Ratio analysis

Question 1

What is gross profit margin

Answer 1

Also known as accounting ratio - the better the performance the higher the GPM

Question 1

What do accounting ratios allow stakeholders to do

Answer 1

judge how effective a business is being run - profit is the main indicator

Question 2

How do you calculate GPM

Answer 2

Gross profit / sales ? 100/1= GPM%
Eg 438700/956500 ? 100/1 = 45.8%

Question 3

what causes variation in GPM between businesses

Answer 3

internal and external factors

Internal factors - size of business, quality of stock control, management of expenses
External factors - level of interest rates , type of industry business is in,

Question 4

What is net profit an indication of

Answer 4

How profitable the business is overall NPR also known as an accounting ratio

Question 5

How do you calculate NPM

Answer 5

Net profit/sales ? 100/1 = NPM%
136500?956500 ? 100/1 = 14.2%

Question 6

How do we judge a good or bad NPM

Answer 6

NPM of 18%+ may be regarded as good, indicating effective business management of cost and expenses
NPM of 10-17% might be viewed as satisfactory, but costs or expenses management could be improved
NPM less than 10% can be regarded was poor , indicating that there are real oportunities for improving cos and expenses management

Question 7

If figures have been calculated and seem low what should managers do

Answer 7

Look for the main causes of poor performance eg are costs of sales high which would lead to a low GPM which may lead to a low NPM