3.5.2.7 Analysing Financial Performance: How to Analyse Profitability.

Question 1

What is the distinction between profit and profitability?

Answer 1

Profit is just a sum whereas profitability is the ability of a business to generate profit or the efficiency of a business in generating profit.

Question 2

Define profitability.

Answer 2

The ability of a business to generate profit or the efficiency of a business in generating profit.

Question 3

What are the two ways to measure the size of a business?

Answer 3

Sales revenue.

Capital employed.

Question 4

How do we measure profitability?

Answer 4

ROCE.

Capital employed.

Question 5

What is the calculation for the gross profit margin (%)?

Answer 5

Gross profit/sales revenue (turnover).

Question 6

What is the calculation for the operating profit margin (%)?

Answer 6

Operating profit/sales revenue (turnover)

Question 7

What is the calculation for the profit of the year margin (%)?

Answer 7

Profit for the year/sales revenue (turnover).

Question 8

What is the gross profit margin or gross profit to sales (%)?

Answer 8

Measures gross profit as a percentage of sales (turnover).

Question 9

What is the gross profit margin or gross profit to sales (%) used for?

Answer 9

This ratio measures how efficiently the business is transforming raw materials into products.

Question 10

What is the operating profit margin or profit from operations margin (%)?

Answer 10

Measures operating profit as a percentage of sales (turnover).

Question 11

What is the operating profit margin or profit from operations margin (%) used for?

Answer 11

Measures how efficiently the business is making a profit from the resources that it is using for its trading activities.

Question 12

What is the profit for the year margin or profit for the year as a percentage of sales?

Answer 12

This measures the profit that is available for shareholders as a percentage of sales (turnover).

Question 13

What is the profit for the year margin or profit for the year as a percentage of sales used for?

Answer 13

This ratio measures how much the shareholders may benefit directly from the financial performance of the business.

Question 14

What are the examples we can make for single, isolated profitability measures.

Answer 14

Comparisons to competitors.

Comparisons overtime.

Comparisons to a standard.

Question 15

What is the consequence of firms with high rates of inventory turnover?

Answer 15

They tend to have a lower profit margins, as their profit arises from the large number of products sold.