Flashcards in Financial Ratios (Profitability) Deck (16):

1

## What is profitability?

### Ability to earn profits.

2

## 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

3

## Give the formula for gross profit margin.

### GP Margin = [Gross Profit / Net Sales Revenue] X 100

4

## Give the formula for gross profit markup.

### GP Markup = [Gross Profit / Cost of Sales] X 100

5

## Give the formula for profit margin

### Profit margin = [Profit /Net Sales Revenue] X 100

6

## Give the formula for Expenses as a % of Net Sales Revenue

### [Expenses / Net Sales Revenue] X 100

7

## Give the formula for returns on equity

### [Profit / Average Equity] X 100

8

## What does GP Margin of 40% mean?

### For each dollar of NSR, business made a gross profit of 40 cents.

9

## What does GP Markup of 30% mean?

### For each dollar of cost of sales, business made a gross profit of 30 cents.

10

## Convert GP markup of 33.33% to GP margin.

### 33.33/133.33 = 25%

11

## What does profit margin of 12% mean?

### For each dollar of net sales revenue, business made a profit of 12 cents.

12

##
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

= 33.33%

13

## Explain return on equity of 8%.

### For each dollar invested, the investor earned 8 cents.

14

## 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.

15

## 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.

16