Profitability ratios (1)

Question 1

What does a ratio do?

Answer 1

A ratio compares one piece of information with another

Question 2

A ratio compares one piece of information with another.
In the case of the gross profit margin, what are the two pieces of information compared?

Answer 2

In the case of the gross profit margin, the two pieces of information compared are:
1) The enterprise’s gross profit
2) Its turnover

Question 3

A ratio compares one piece of information with another.
In the case of the gross profit margin, the two pieces of information compared are the enterprise’s gross profit and its turnover.
What does the gross profit margin calculate?

Answer 3

The gross profit margin calculates gross profit as a percentage of sales revenue

Question 4

A ratio compares one piece of information with another.
In the case of the gross profit margin, the two pieces of information compared are the enterprise’s gross profit and its turnover.
The gross profit margin calculates gross profit as a percentage of sales revenue and shows what?

Answer 4

The gross profit margin calculates gross profit as a percentage of sales revenue and shows what the gross profit is for every £ of sales

Question 5

To calculate gross profit margin, you will need to extract figures from where?

Answer 5

To calculate gross profit margin, you will need to extract figures from the enterprise’s statement of comprehensive income

Question 6

What is the formula for gross profit margin (GPM)?

Answer 6

The formula for gross profit margin (GPM) is:
Gross profit margin = (Gross profit ÷ Sales revenue) x 100

Question 7

The formula for gross profit margin (GPM) is:
Gross profit margin = (Gross profit ÷ Sales revenue) x 100

See page 34 of the revision guide for an example.

How will the answer be shown?

Answer 7

The answer will be shown as a percentage

Question 8

Interpreting the gross profit margin:
For example, an enterprise has a gross profit margin of 60%.
For every £ it makes in sales, it generates how much in gross profit?

Answer 8

For every £ it makes in sales, it generates £0.60 in gross profit

Question 9

Interpreting the gross profit margin:
For example, an enterprise has a gross profit margin of 60%.
For every £ it makes in sales, it generates £0.60 in gross profit.
If the gross profit margin falls, what may the enterprise do?

Answer 9

If the gross profit margin falls, the enterprise may take steps to:
1) Reduce its cost of sales
Or
2) Increase its sales revenue