Just trying to wrap my mind around Profit to Earnings Ratio calculation.
Intuitively I would think profit to earnings is the fraction of total earnings that is the profit (profit / [profit+direct labor+overhead]). This also seems like a useful thing to know: How much of what I’m earning is profit?
However, according to the definitions I’m seeing profit to earnings is the profit as a fraction of the net operating revenue (I understand this as direct labor+overhead) and is calculated (profit / [direct labor+overhead]). This might be useful to know: How does what I’m gaining compare to how much I’m putting in. However, if this is the case Profit to Earnings Ratio seems like a misnomer, and it should actually be called Profit to Operating Ratio.
I’m not trying to be pedantic, but just want to make sure I understand this correctly, so please point out if I am wrong.