finance exam - profitability ratios Flashcards
what is the three different types of profitability ratios
1) gross profit ratio
2) net profit ratio
3) return on equity ratio
what is the gross profit ratio?
gross profit/sales
calculate the gross profit ratio of 2018
38.3% (38c)
comment on the gross profit ratio of the business in 2018
for every $1 in sales revenue, there was 61.66 C absorbed by COGS & 38.34 became gross profit
calculate the gross profit ratio of 2019
37.82% (38c)
comment on the gross profit ratio of the business in 2019
for every $1 in sales revenuem there was 62.18c absorbed by COGS & 37.82c became gross profit
the higher the Gross profit ratio is…
the more likely a business is to be profitable
high ratio means COGS is low relative to sales that’ll bring upon profitability
what is gross profit
gross profit, the amount of money left after subtracting the COGS from the total sales revenue. This is the profit a company makes before accounting for other expenses like operating costs, taxes, and interest.
what are COGS
expenses
what is the comparative ratio? of the GR
52 cents difference went up (increased)
-good thing- business is more profitable
what does a low/decling ratio situation show in the gross profit ratio
it shows that a business needs to obtsin stock at a lower price and to raise prices on their products. increasing the level of sales can also componsate for lower profit margins
what is the net profit ratio
net profit/sales x 100
what is the net profit ratio for 2018?
22.4%
comment on the net profit ratio of 2018
of every $1 of sales revenue, 22.4c became net profit
what is the net profit ratio of 2019
21.2%
comment on net profit ratio of 2019
for every $1 in sales revenue, there is 21.2c becames profit
provide a comparative analysis
it decreased by 1.2 c
- a bad thing ss higher figurers aree better
why should net profit be higher?
it measures the % each dollar of sales that is left after all expenses are paid (profit)
strats to increase the net profit ratio
-reducing expenses
-increase volume of sales
what is the return on equity ratio
How effective funds contributed by the owners have been at generating profits
* The return on their investment
* The higher the ratio, the greater the return on an owner’s investment
what is the return on equity ratio and coment on it for 2018
for every $1 contributed, the owner receives 55.6C in return
what is the return on equity ratio and coment on it for 2019
61%
for every $1 contributed, the owner receives 61c in return
why is this ratio important to maintain
- The ratio is an indication to potential shareholders if it they will receive a return on their investment. A high return on equity, means that people are more likely to invest in a business.
