Flashcards in Financial Ratios (Profitability) Deck (16):
What is profitability?
Ability to earn profits.
State the profitability ratios.
1. Gross profit margin
2. Gross profit mark up
3. Profit margin
4. Expenses as a % of net sales revenue
5. Returns on equity
Give the formula for gross profit margin.
GP Margin = [Gross Profit / Net Sales Revenue] X 100
Give the formula for gross profit markup.
GP Markup = [Gross Profit / Cost of Sales] X 100
Give the formula for profit margin
Profit margin = [Profit /Net Sales Revenue] X 100
Give the formula for Expenses as a % of Net Sales Revenue
[Expenses / Net Sales Revenue] X 100
Give the formula for returns on equity
[Profit / Average Equity] X 100
What does GP Margin of 40% mean?
For each dollar of NSR, business made a gross profit of 40 cents.
What does GP Markup of 30% mean?
For each dollar of cost of sales, business made a gross profit of 30 cents.
Convert GP markup of 33.33% to GP margin.
33.33/133.33 = 25%
What does profit margin of 12% mean?
For each dollar of net sales revenue, business made a profit of 12 cents.
A business made a gross profit of
$28 000. The cost of sales was $56 000. What is the GP margin
GP margin = [28 000 / (28000+56000)] X 100
Explain return on equity of 8%.
For each dollar invested, the investor earned 8 cents.
Business A earned a GP margin of 30% and a profit margin of 5%. Explain what it means.
For each dollar of NSR, the business earned a gross profit of 30 cents and a profit of 5 cents. Business spent 25 cents of each dollar of NSR on expenses.
Business A has a GP margin of 30% and Business B has a GP margin of 20%. What could have been the cause of difference, given that they are in the same industry?
A high margin is due to either high selling price or a low cost of sales.
- Business A might have set a higher selling price than B.
- Business A might have a lower cost due to good relationship with supplier or bulk purchase of inventory
- Business B might be having a special promotion and thus sell at a lower price
- Business A might be established and able to sell at high price as it has loyal customers.