Accounting Ratios and Profitability Analysis

Front

What are profitability ratios used for?

Back

To assess how successful the management of a business has been at converting sales revenue into gross profit and net profit.

Front

How is Gross Profit Margin calculated?

Back

Gross profit margin (%) = (gross profit / sales revenue) x 100

Front

What is the formula for Gross Profit?

Back

Gross profit = revenue - cost of goods sold

Front

How is Net Profit Margin calculated?

Back

Net profit margin (%) = (net profit before interest and tax / sales revenue) x 100

Front

What does ROCE stand for?

Back

Return on Capital Employed

Front

What does ROCE measure?

Back

It assesses how efficiently an organization uses its capital or total assets to create goods and services that are turned into profit.

Front

What does a deteriorating Gross Profit Margin indicate?

Back

It implies that sales are not being transferred into trading profits.

Front

What does the Net Profit Margin indicate?

Back

It signals the capacity the firm has to generate profits after overhead or indirect costs have been taken into account.

Front

What are some ways to improve profit margins?

Back

Increase selling price, increase sales through advertising, reduce direct costs, and reduce indirect costs.

Front

What is the Current Ratio?

Back

Current ratio = current assets / current liabilities.