Profitable ratios Flashcards
What is profitability?
Profitability is a measure of the profit of a firm in relation to another factor.
It allows for a more comprehensive assessment of the performance of a firm by comparing one figure to another.
What is gross profit margin?
Gross profit/ revenue 100
This ratio looks at gross profit as a percentage of sales turnover. It shows, that for every £1 made in sales, how much is left as gross profit after the cost of goods sold has been deducted.
What is net profit/ operating margin
Net profit/ revenue x100
This ratio looks at net profit as a percentage of sales turnover. It shows, for every £1 made in sales, how much of it is left as net profit after all expenses have been deducted
What is ROCE (Return on Capital Employed) ?
Net profit before interest and tax/ capital employed 100
This ratio shows the percentage return a business is achieving from the capital (or money) being used to generate that return.
What is Mark up?
Gross profit/ cost of sales x 100
This ratio looks at profit as a percentage of cost of sales. It shows what percentage of costs of sales is added to reach selling price.
What is ROCE used for?
Investors will often compare ROCE to the interest rate being offered in a bank or business society to see if their investment is working effectively for them in generating a return.
