5 - Profitability Flashcards
What Is Profitability?
The amount of profit relative to another variable, such as revenue.
What Are The 3 Profitability Ratios?
~ Gross profit margin (GPM).
~ Operating profit margin (OPM).
~ Profit for the year margin (P4YM).
What Is GPM?
Measure of a firms profitability by looking at the relationships between gross profit and sales revenue.
What Is The Ideal Figure For GPM?
(2 Points)
~ Higher the better.
~ Business makes more profit, on each unit of sale.
How Can GPM Be Improved?
(2 Points)
~ Increasing prices.
~ Reducing the direct cost of sales.
How Is Gross Profit Calculated?
Sales Revenue - Cost Of Sales
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 Is The Ideal Figure For OPM?
(2 Points)
~ Higher the better.
~ Shows the business is more efficient at turning revenue into operating profit
How Can OPM Be Improved?
(2 Points)
~ Increasing prices.
~ Reducing the cost of sales or operating expenses.
How Do You Calculate Operating Profit?
Sales Revenue - Operating Expenses
How Do You Calculate OPM?
Operating Profit / Sales Revenue x 100
What Is P4YM?
Measure if a firms profitability by looking at the relationship between profit for the year and sales revenue.
What Is The Ideal Figure For P4YM?
(2 Points)
~ Higher the better.
~ Attractive to shareholders, may indicate high dividend payments.
How Do You Calculate P4Y?
Operating Profit + Other Profit - Net Finance Costs - Tax
How Do You Calculate P4YM?
Profit For The Year / Sales Revenue x 100
What Are Some Methods Of Improving Profitability & Profit?
(4 Points)
~ Increasing prices, depends on PED.
~ Reduce costs of production, may be at the cost of quality.
~ Increase marketing, to increase demand.
~ Improving the quality, reducing costs.
