How to Interpret a Low or High PV Ratio in Business

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Detailed Solution

The PV Ratio is a direct indicator of your company's profitability and financial resilience.

High PV Ratio (e.g., 60%)

A high PV ratio is desirable. It means:

Low Variable Costs: Your variable costs (materials, direct labor) are a small part of your sales price.
High Profitability: A large portion of every sale goes directly to covering fixed costs and building profit.
High Margin of Safety: The business can absorb a larger drop in sales before it starts making a loss.

Low PV Ratio (e.g., 20%)

A low PV ratio is a cause for concern. It means:

High Variable Costs: Your variable costs are "eating up" most of your sales revenue.
Low Profitability: You must make a very high volume of sales to cover fixed costs.
High Risk: A small increase in material costs or a small drop in sales price can quickly wipe out your profits.

If your business has a , it means your as a percentage of sales. To improve it, you must either raise prices, reduce variable costs, or change your product mix.

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