3.7 Flashcards
What is the formula for gross profit margin?
Gross profit / revenue x 100
What is the gross profit margin?
Measures how efficiently a business is producing and selling its products. It shows the percentage of sales revenue that exceeds the cost of goods sold
If gross profit margin is shown as 20% how much gross profit does the business receive per pound?
20p of gross profit
Is it better to have a higher or lower gross profit margin?
Higher
How can you improve gross profit margin?
Raise sales revenue
Lower the cost of goods sold
What is the formula for operating profit margin?
Operating profit / Revenue x 100
What is the Operating Profit Margin?
Measures how much efficiently a business converts its revenue into operating profit. It reflects the companies ability to manage its core operations effectively. Excluding the effects of interest and tax
What is seen as an excellent Operating Profit Margin?
20% and above
What is seen as a weak Operating Profit Margin?
Below 5%
What does a higher Operating Profit Margin indicate?
That a business is managing its constant well and generating a strong profit from its core operations
What does a lower Operating Profit Margin indicate?
That a business has higher costs or pricing issues
How can a business improve their Operating Profit Margin?
Increasing gross profit while keeping expenses the same
Maintain gross profit and reduce expenses
What is the revenue for Profit for the year margin?
PFTY / Revenue x 100
What is profit for the year margin?
A key profitability ratio that measures how efficiently a business is generating profit from its operations, before interest and taxes
If the profit in relation to revenue is shown as 5% how much profit will the business receive each pound?
5p profit
Is higher or lower profit for the year margin better for a business?
Higher
How can a business improve its profit for the year margin?
Lower repayments on loans
Lowering expenses
Increasing revenue
What is the equation for return on capital employed?
Operating Profit / capital employed x 100
What is Return on Capital employed?
Measures how efficiently a business is using its capital to generate profit
What is seen as a strong Return on Capital Employed?
Above 15%
What is seen as a weak Return on Capital Employed?
Below 10%
Is a higher or lower Return on Capital Employed better?
Higher
How can Return on Capital Employed be improved?
Reduce Capital Employed
What is the calculation for Current ratio?
Current assets / current liabilities
What is Current Ratio?
Measures a businesses ability to pay its short-term liabilities using its short-term assets
What does a current ratio of 1.5-2.0 suggest?
The business is considered healthy and can comfortably cover its short term liabilities
What does a current ratio of below 1.0 suggest?
Indicated liquidity problems, the business may struggle to pay its debts due to a lack of assets
What does a current ratio of above 2.0 indicate?
The business isn’t using its assets effectively, it is holding too much cash or inventory
What does a current ratio of 1.65:1 mean?
£1.65 of assets for every £1 of liabilities
Is a higher or lower current ratio better for a business?
It is better to have higher but too high can suggest that the business is holding too much inventory or cash
How can current ratio be improved?
Increase current assets
Reduce current liabilities
Improve working capital management
What is the equation for gearing?
Non current liabilities / total equity + non current liabilities
x100
What is gearing?
Measures the proportion of a businesses capital that comes from long term debt rather than equity. It indicates how reliant a business is on borrowed money to finance its operations
What is considered a high gearing ratio?
50% and above
What is considered a moderate gearing ratio?
25%-50%
What is considered a low gearing ratio
25% and below
What does high gearing mean?
Business is heavily financed by debt which in return brings higher financial risk but more potential for growth
What does low gearing mean?
Business is financed by equity which in return brings lower financial risk but less chance of growth
How can a business improve gearing?
Reduce non current liabilities
Increase total equity
Improve profitability
What is the equation for inventory turnover (days)?
Average inventory / cost of sales x 365
What is inventory turnover (days)?
Measures how long, on average, a business holds its inventory before selling it, reflects how effectively a business manages its stock levels
How do you measure Inventory turnover (days)?
eg: 3 means 3 days
Fast moving industries
10-30 days
Moderate moving industries
30-90 days
Slow moving industries
90+ days
Is it better to have a high or low inventory turnover (days)?
Lower
How can a business improve its inventory turnover (days)?
Improve sales
Reduce inventory
Streamline production
