5 - Profitability Flashcards
What Does Profitability Measure?
The finical performance of a business by comparing profits achieved to a second variable.
What Are The 3 Profitability Ratios?
~ Gross profit margin (GPM).
~ Operating profit margin (OPM).
~ Profit for the year margin (POYM).
What Is GPM?
Measure of a firms profitability by looking at the relationships between gross profit and sales revenue.
What Does It Mean If GPM Is Low?
(2 Points)
~ Firm is not managing the cost of sales effectively
~ Sales are in decline.
How Do You Calculate GPM?
Gross Profit / Sales Revenue x 100
What Is OPM?
Measure of a firms profitability by looking at the relationship between net profit and sales revenue.
What Does It Mean If OPM Is Low?
(2 Points)
~ Not managing expenses effectively.
~ Sales are in decline.
How Do You Calculate OPM?
Operating Profit / Sales Revenue x 100
What Is POYM?
Measure if a firms profitability by looking at the relationship between profit for the year and sales revenue.
What Does It Mean If POYM Is Low?
(3 Points)
~ GP or OP are in decline.
~ Interest rates have changed.
~ Taxation rates have changed.
How Do You Calculate POYM?
Profit For The Year / Sales Revenue x 100
What Are Some Methods Of Improving Profitability & Profit?
(3 Points)
~ Sell the same quantity but at a higher price.
~ Sell more at the current price.
~ Sell the same at the same price but reduce costs.
