3.7

Question 1

What is the formula for gross profit margin?

Answer 1

Gross profit / revenue x 100

Question 2

What is the gross profit margin?

Answer 2

Measures how efficiently a business is producing and selling its products. It shows the percentage of sales revenue that exceeds the cost of goods sold

Question 3

If gross profit margin is shown as 20% how much gross profit does the business receive per pound?

Answer 3

20p of gross profit

Question 4

Is it better to have a higher or lower gross profit margin?

Answer 4

Higher

Question 5

How can you improve gross profit margin?

Answer 5

Raise sales revenue
Lower the cost of goods sold

Question 6

What is the formula for operating profit margin?

Answer 6

Operating profit / Revenue x 100

Question 7

What is the Operating Profit Margin?

Answer 7

Measures how much efficiently a business converts its revenue into operating profit. It reflects the companies ability to manage its core operations effectively. Excluding the effects of interest and tax

Question 8

What is seen as an excellent Operating Profit Margin?

Answer 8

20% and above

Question 9

What is seen as a weak Operating Profit Margin?

Answer 9

Below 5%

Question 10

What does a higher Operating Profit Margin indicate?

Answer 10

That a business is managing its constant well and generating a strong profit from its core operations

Question 11

What does a lower Operating Profit Margin indicate?

Answer 11

That a business has higher costs or pricing issues

Question 12

How can a business improve their Operating Profit Margin?

Answer 12

Increasing gross profit while keeping expenses the same
Maintain gross profit and reduce expenses

Question 13

What is the revenue for Profit for the year margin?

Answer 13

PFTY / Revenue x 100

Question 14

What is profit for the year margin?

Answer 14

A key profitability ratio that measures how efficiently a business is generating profit from its operations, before interest and taxes

Question 15

If the profit in relation to revenue is shown as 5% how much profit will the business receive each pound?

Answer 15

5p profit

Question 16

Is higher or lower profit for the year margin better for a business?

Answer 16

Higher

Question 17

How can a business improve its profit for the year margin?

Answer 17

Lower repayments on loans
Lowering expenses
Increasing revenue

Question 18

What is the equation for return on capital employed?

Answer 18

Operating Profit / capital employed x 100

Question 19

What is Return on Capital employed?

Answer 19

Measures how efficiently a business is using its capital to generate profit

Question 20

What is seen as a strong Return on Capital Employed?

Answer 20

Above 15%

Question 21

What is seen as a weak Return on Capital Employed?

Answer 21

Below 10%

Question 22

Is a higher or lower Return on Capital Employed better?

Answer 22

Higher

Question 23

How can Return on Capital Employed be improved?

Answer 23

Reduce Capital Employed

Question 24

What is the calculation for Current ratio?

Answer 24

Current assets / current liabilities

Question 25

What is Current Ratio?

Answer 25

Measures a businesses ability to pay its short-term liabilities using its short-term assets

Question 27

What does a current ratio of 1.5-2.0 suggest?

Answer 27

The business is considered healthy and can comfortably cover its short term liabilities

Question 28

What does a current ratio of below 1.0 suggest?

Answer 28

Indicated liquidity problems, the business may struggle to pay its debts due to a lack of assets

Question 29

What does a current ratio of above 2.0 indicate?

Answer 29

The business isn’t using its assets effectively, it is holding too much cash or inventory

Question 30

What does a current ratio of 1.65:1 mean?

Answer 30

£1.65 of assets for every £1 of liabilities

Question 31

Is a higher or lower current ratio better for a business?

Answer 31

It is better to have higher but too high can suggest that the business is holding too much inventory or cash

Question 32

How can current ratio be improved?

Answer 32

Increase current assets Reduce current liabilities Improve working capital management

Question 33

What is the equation for gearing?

Answer 33

Non current liabilities / total equity + non current liabilities x100

Question 34

What is gearing?

Answer 34

Measures the proportion of a businesses capital that comes from long term debt rather than equity. It indicates how reliant a business is on borrowed money to finance its operations

Question 35

What is considered a high gearing ratio?

Answer 35

50% and above

Question 36

What is considered a moderate gearing ratio?

Answer 36

25%-50%

Question 37

What is considered a low gearing ratio

Answer 37

25% and below

Question 38

What does high gearing mean?

Answer 38

Business is heavily financed by debt which in return brings higher financial risk but more potential for growth

Question 39

What does low gearing mean?

Answer 39

Business is financed by equity which in return brings lower financial risk but less chance of growth

Question 40

How can a business improve gearing?

Answer 40

Reduce non current liabilities Increase total equity Improve profitability

Question 41

What is the equation for inventory turnover (days)?

Answer 41

Average inventory / cost of sales x 365

Question 42

What is inventory turnover (days)?

Answer 42

Measures how long, on average, a business holds its inventory before selling it, reflects how effectively a business manages its stock levels

Question 43

How do you measure Inventory turnover (days)?

Answer 43

eg: 3 means 3 days Fast moving industries 10-30 days Moderate moving industries 30-90 days Slow moving industries 90+ days

Question 44

Is it better to have a high or low inventory turnover (days)?

Answer 44

Lower

Question 45

How can a business improve its inventory turnover (days)?

Answer 45

Improve sales Reduce inventory Streamline production