3.5 Profitability Ratios

Which of the following is not a financial ratio?

• Net Profit

• Gross Profit

• Staff Turnover

• ROCE

Which of the following cannot be analysed with a profitability ratio?

• Historical comparisons of a business in two different time periods

• The amount of cash spent by the business

• A firm’s financial performance compared with its competitors

• The return on financial investments made

What does ROCE stand for?

• Real Operational Capital Employed

• Return on Capital Employed

• Revenues Overheads Costs Expenditure

• Rate of Capital Expenditure

How is the gross profit margin (GPM) calculated?

• Gross profit – Expenses

• (Gross profit ÷ Sales revenue) × 100

• Sales revenue – Cost of goods sold

• (Gross profit ÷ Investment) × 100

Which of the following statements best describes the (net) profit margin (NPM)?

•  It shows what proportion of profits are being distributed to shareholders

• It shows how well a company is controlling its costs, including expenses

• It shows what return is being made on assets employed in the business

• It show how efficiently a company is turning profits into cash

If sales revenue equals $10 million, cost of goods sold equal $6 million and expenses equals $3 million, what is the gross profit margin?

• 10%

• 20%

• 40%

• $35

Answer explanation

The gross profit margin (GPM) shows the value of gross profit as a percentage of sales revenue. Gross profit is calculated by subtracting cost of goods sold (COGS) from sales revenue. In this case, gross profit = $10m – $6m = $4m. Hence, GPM = $4m ÷ $10m = 40%. Therefore, the correct answer is 40%.

If sales revenue equals $10 million, cost of goods sold equal $6 million and expenses equals $3 million, what is the net profit margin?

• 10%

• 20%

• 30%

• 40%

Answer explanation

The net profit margin (NPM) shows the value of net profit as a percentage of sales revenue. Net profit is calculated by subtracting expenses from gross profit. In this case net profit = $10m – $6m – $3m = $1m. Hence, the NPM = $1m ÷ $10m = 10%. Therefore, the correct answer is 10%

TRUE OR FALSE

Introducing new products with a higher profit margin would improve the gross profit margin (GPM) of a business.

• True

• False

True or False?

Adopting aggressive promotional strategies that persuade more customers to buy a firm's products can help to improve its gross profit margin (GPM).

• True

• False

Profitability Ratios are expressed as ?

Example: 35.22

• % percentages

  35.22%

• $ currency (dollars, euros, pounds)

  $35.22

• Units sold

  35 units

• Time (year, months)

  35 months