4E_ FSA (Profitability) Lesson 1 & 2

Financial Statement Analysis

[Absolute Figures & Profitability Ratios]

Lesson Objectives:

•  The difference between absolute figures and profitability ratios

• Calculate and interpret various profitability ratios

Multiple Select

What are the two methods to measure profitability?

• Liquidity

• Absolute Figures

• Dividends

• Profitability ratios

Open Ended

Explain the importance of profitability.

Open Ended

Refer to Worksheet 2, Activity 1, Which business is more profitable?

It is difficult to tell which is more profitable based on absolute figures.

• Higher value could be due to size instead of better performance.

  
  

• Better analysis use of financial ratios on profitability.

Profitability Ratios

Gross Profit Margin (%)

• Measures how much profit a business earns for every dollar of net sales revenue. The higher the gross profit margin, the more profitable the business.

  
  

• Let’s say your Net Sales Revenue is $30,000 and Cost of sales: $20,000

• Gross Profit Margin : $10 000 / $30000*100= 33%

Mark-up on cost (%)

• Measures how much gross profit a business earns for every dollar of its cost of sales

• The higher the mark-up on cost, the more profitable the business.

• Let's say you sell toys. Cost of the toy $10. You sell it for $20.

• Gross Profit: $10 Cost of Sales: $10

• Mark-up on cost: $10/$10*100= 100%

Profit margin (%)

• Measure how much profit a business earns for every dollar of equity invested by the owner/shareholders.

   

• The higher the profit margin, the more profitable the business.

• Let’s say your Profit for the year is $10 000 and Net Sales Revenue $20 000

• Profit Margin: $10 000/$20 000= 50%

Practice Time!

Put your mobile devices away and look at Worked Example 1

Quiz Time!

Multiple Choice

The following information was provided by KT Trading for the year ended 31 July 2019.

Net sales revenue : $55 000

Gross profit : $16 500

REQUIRED

Calculate the gross profit margin.

• 30

• 30%

• 40

• 16 500

Multiple Choice

The following information was provided by Meiyi Trading for the year ended 31 August 2020.

Net sales revenue :

$400 000

Cost of sales : $250 000

REQUIRED

Calculate the mark-up on cost.

• 60%

• 38%

• $250 000

• 30%

Multiple Choice

The following information was provided by Cool Trading for the year ended 30 June 2020.

Sales revenue : $470 000

Sales returns : $2 000

Gross Profit: $120 000

Profit for the year :

$117 000

REQUIRED:

Calculate the profit margin.

• 20%

• 25%

• 10%

• $117 000

Multiple Choice

The following information was provided by Nessa Stationery for the year ended 31 January 2021.

Profit for the year : $108 000

Average equity : $80 000

REQUIRED:

Calculate the return on equity.

• 135%

• 100%

• 35%

• $80 000

Return on equity (%)

• Measures how much profit a business earns for every dollar of equity by the owner/shareholder in the business

• The higher the return on equity, the more efficient the business is in generating profits for its owner/shareholders