leadership
Profitability Ratios
Most firms aim to make a profit. In order to assess the efficiency of a business in achieving this major objective, two profitability ratios may be used: the return on capital employed and net profit margin. In both measures, a high percentage represents a better performance than a low percentage, as a business wants to earn high profits.
The gross profit margin
This measures the gross profit of the business as a proportion of the sales revenue. It is calculated using the following formula:
Gross profit margin (% )=
Gross Profit x 100
sales
For example, if a business has gross profit of £4 million and sales revenue of £6 million, then the gross profit margin would be:
This means that for every £1 of sales revenue, £0.67 remains after all direct expenses have been deducted. This money then contributes towards covering the other expenses of the business.
The business would want this margin to be as high as possible, since a high margin will leave more profit for covering the remaining expenses and, if the business is a 'company', for covering the dividend payments to shareholders.
Calculate the Gross Profit Margin for Yummo Chocolates Ltd.
Working
Answer
2011
2012
What conclusions can you draw from your calculations?
NET PROFIT MARGIN
The net profit margin measures the net profit as a percentage of sales. Net and operating profits are the best measure of s firm’s profit, while sales turnover is an excellent measure of scale.
Net profit margin is calculated by:
Net profit margin (% )= net profit before tax x 100
sales
For example, if a business has gross profit of £1 million and sales revenue of £6 million, then the net profit margin would be:
This means that for every £1 of sales revenue, 16.7 pence remains after all direct and indirect expenses have been deducted. This money then contributes towards covering the corporation tax that must be paid on profits to the Inland
Most firms aim to make a profit. In order to assess the efficiency of a business in achieving this major objective, two profitability ratios may be used: the return on capital employed and net profit margin. In both measures, a high percentage represents a better performance than a low percentage, as a business wants to earn high profits.
The gross profit margin
This measures the gross profit of the business as a proportion of the sales revenue. It is calculated using the following formula:
Gross profit margin (% )=
Gross Profit x 100
sales
For example, if a business has gross profit of £4 million and sales revenue of £6 million, then the gross profit margin would be:
This means that for every £1 of sales revenue, £0.67 remains after all direct expenses have been deducted. This money then contributes towards covering the other expenses of the business.
The business would want this margin to be as high as possible, since a high margin will leave more profit for covering the remaining expenses and, if the business is a 'company', for covering the dividend payments to shareholders.
Calculate the Gross Profit Margin for Yummo Chocolates Ltd.
Working
Answer
2011
2012
What conclusions can you draw from your calculations?
NET PROFIT MARGIN
The net profit margin measures the net profit as a percentage of sales. Net and operating profits are the best measure of s firm’s profit, while sales turnover is an excellent measure of scale.
Net profit margin is calculated by:
Net profit margin (% )= net profit before tax x 100
sales
For example, if a business has gross profit of £1 million and sales revenue of £6 million, then the net profit margin would be:
This means that for every £1 of sales revenue, 16.7 pence remains after all direct and indirect expenses have been deducted. This money then contributes towards covering the corporation tax that must be paid on profits to the Inland