Profit, Cash flow, Gearing, ROCE Flashcards
(23 cards)
What is the formula for Gross Profit Margin and what does it show?
Gross Profit Margin (%) = (Gross Profit / Revenue) x 100
It shows the % of revenue remaining after covering the cost of goods sold.
To calculate Gross Profit, use: Gross Profit = Revenue - Cost of Sales.
What is the formula for Operating Profit Margin and what does it indicate?
Operating Profit Margin (%) = (Operating Profit / Revenue) x 100
Indicates how much profit remains after deducting both cost of sales and operating expenses.
To calculate Operating Profit, use: Operating Profit = Revenue - Cost of Sales - Operating Expenses.
(Note: Operating Profit does not include interest or tax.)
What is the formula for the Current Ratio and what does it measure?
Current Ratio = Current Assets / Current Liabilities
Measures a firm’s short-term liquidity — how easily it can pay off its short-term obligations.
To calculate:
Current Assets = Cash + Inventory + Receivables (e.g., trade debtors)
Current Liabilities = Overdrafts + Payables (e.g., trade creditors) + Short-term loans
What is the formula for ROCE and what does it show?
ROCE (%) = (Operating Profit / Capital Employed) x 100
Shows how efficiently the business generates operating profit from its total capital investment.
To calculate Capital Employed, use: Capital Employed = Total Equity + Non-current Liabilities.
How do you calculate ROCE when revenue and profit change year-on-year?
Calculate new revenue (e.g., applying growth % to previous year’s figure).
Apply new Operating Profit Margin: Operating Profit = Revenue x Operating Profit Margin.
Use standard ROCE formula: Operating Profit / Capital Employed x 100.This tracks how growth affects efficiency in using capital.
What is the formula for Net Profit Margin and what does it represent?
Net Profit Margin (%) = (Net Profit / Revenue) x 100
It shows how much of each £1 of revenue is retained as net profit after all expenses, interest, and tax are deducted.
Net Profit = Operating Profit - Interest - Tax
What is the formula for Markup and how does it differ from profit margins?
Markup (%) = (Gross Profit / Cost of Sales) x 100
It shows the % added to the cost of goods to reach the selling price.
Difference: Markup is based on cost, while profit margins are based on revenue.
How do you calculate total profit using revenue, variable costs, and fixed costs?
Profit = Total Revenue - Total Variable Costs - Fixed Costs
Used in scenarios where you’re given sales volumes, price, and cost per unit.
Revenue = Price × Quantity Sold
Total VC = Variable Cost per Unit × Quantity Sold
Variable Cost per Unit = Total Variable Costs / Quantity Sold
How do you calculate forecasted profit with changing selling price and cost per unit?
Adjust price and cost per unit using % change
Calculate Revenue = New Price × Quantity
Calculate Total VC = New VC × Quantity
Profit = Revenue - Total VC - Fixed Costs
How do you calculate units sold from total revenue and use it to find profit?
Units Sold = Total Revenue ÷ Selling Price per Unit
Once units sold are known:
Calculate Total Variable Cost = Units Sold × Variable Cost per Unit
Then use: Profit = Revenue - Total Variable Costs - Fixed Costs
How do you calculate profit if variable cost is a % of the price?
VC per unit = % of Price × Price
Contribution per unit = Price - VC
Profit = (Contribution per unit × Units Sold) - Fixed Costs
What is contribution and how is it calculated?
Contribution is the amount remaining after variable costs are subtracted from revenue, used to cover fixed costs and generate profit.
Contribution per Unit = Selling Price - Variable Cost per Unit
Total Contribution = Contribution per Unit × Quantity Sold
Profit = Total Contribution - Fixed Costs
What is gearing and how is it calculated?
Gearing (%) = (Long-Term Liabilities / Capital Employed) x 100
It measures the proportion of a business’s funding that comes from long-term borrowing.
Capital Employed = Total Equity + Long-Term Liabilities
Total Equity = the value of funds provided by shareholders and reinvested profits. It includes:
Share Capital = money invested in the business by shareholders.
Retained Profit = accumulated profit not distributed as dividends.
What happens to gearing when a firm takes out more long-term loans?
If additional investment is funded through borrowing:
Long-Term Liabilities increase
Capital Employed increases
Gearing will rise if the % increase in debt is proportionally higher than the overall rise in capital.
How can gearing affect a firm’s investment and borrowing decisions?
High gearing (>50%) may deter lenders or increase interest rates
Low gearing (<25%) may suggest underuse of debt funding
Firms must consider risk appetite, repayment capacity, and stakeholder views when increasing gearing
What are the typical benchmarks for evaluating gearing ratios?
<25% = Low gearing (conservative)
25–50% = Moderate gearing
50% = High gearing (risky)
Evaluation depends on:
Industry norms
Predictability of income
Cost of debt
Willingness of shareholders to dilute ownership vs take on debt
How do you calculate and compare original vs new gearing?
Original Gearing = (Original Long-Term Liabilities / Original Capital Employed) × 100
New Gearing = (New Long-Term Liabilities / New Capital Employed) × 100
New liabilities or equity (e.g., new loans or share issues) should be added to the relevant section of the capital structure before recalculating.
What are the key components of a cash flow forecast?
A cash flow forecast includes:
Cash Inflows: money received (e.g., sales revenue, loans, investments)
Cash Outflows: money paid out (e.g., wages, rent, bills)
Net Cash Flow = Inflows - Outflows
Opening Balance = cash at the start of the period
Closing Balance = Opening Balance + Net Cash Flow
How do you calculate net cash flow and cash balances month-by-month?
Step-by-step:
Net Cash Flow = Total Inflows - Total Outflows
Closing Balance = Opening Balance + Net Cash Flow
Next Month’s Opening Balance = Previous Month’s Closing Balance
Repeat for each month/quarter in the forecast.
How do you handle changing inflows or outflows over time in forecasts?
Apply % increase or decrease to previous value. E.g.,
New inflow = Previous inflow × (1 + growth rate)
New outflow = Previous outflow × (1 + inflation rate or % rise)
Adjust for one-off costs (e.g., rent paid quarterly, promotional spend)
Why are cash flow forecasts useful, and what do they depend on?
Cash flow forecasts:
✅ Help identify liquidity issues early✅ Guide planning for investment or loan requirements✅ Inform managers about timing of costs and revenuesDepend on:
Accuracy of estimates (e.g., sales projections)
External changes (inflation, customer delays)
Seasonality or unexpected costs
What is benchmarking in business and what are its benefits and drawbacks?
Benchmarking is the process of comparing a business’s performance, practices, or processes against those of leading competitors or industry standards.
✅ Benefits:
Identifies areas for improvement
Encourages adoption of best practices
Can improve efficiency and competitiveness
Drives performance through measurable goals
⚠️ Drawbacks:
May stifle innovation (copying others instead of creating)
Not all practices from other firms are transferable
Can be time-consuming and costly
Risk of focusing too much on others rather than internal needs
What should you know about the acid test ratio for AQA A-level Business?
Formula: (Current Assets – Inventory) ÷ Current Liabilities
Purpose: Measures a firm’s ability to pay short-term debts without relying on inventory
Interpretation:
<1 suggests potential liquidity issues
≈1 is typically healthy, but depends on the industry
Key difference from current ratio: Inventory is excluded because it’s not easily converted to cash quickly.
