Income Statement Key ratios: profitability analysis (cost of sales method)

Question 1

Name key ratios: Profitability analysis (cost of sales method)

Answer 1

Gross profit margin: gross profit / revenues

Operating profit margin (=EBIT margin): EBIT / revenues

Profit margin (= Return on Revenues/Sales): Net profit / revenues

Question 2

key ratios: Profitability analysis

Name Segment Key Figures

Answer 2

Sales contribution ratio: Segment revenues / revenues of the group

EBIT contribution ratio: Segment EBIT / EBIT of the group

Profit contribution ratio: Segment profit / profit of the group

Question 3

Gross profit margin

Answer 3

Gross profit margin: gross profit / revenues

• percentage of the profit contribution of products/services sold
• Growth of this ratio shows how a companys procurement prices have changed
• Information on the possible latitude available for price cuts if competition becomes more intense

Question 4

Operating profit margin

Answer 4

Operating profit margin (= EBIT margin): EBIT / revenues

• Provides information on a companys earnings power
• Suitable for use as a relative indicator in international, cross-industry comparisons of companies

> > > The higher the EBIT margin, the stronger the impact of a change in sales will be on earnings
Not positive EBIT margin over a longer period -> business model must be questioned

Question 5

Profit margin

Answer 5

Profit margin (= Return on revenues/sales): net profit / revenues

• Meaningful, when comparing individual group units, to assess which unit was able to generate which return -> differentiation between profitable and non-profitable business units
• However: profits are highly subject to fluctuations