Measuring profitability Flashcards
what are profitability ratios used for
Profitability ratios are used to assess a business’s ability
to generate a profit.
allow managers and stakeholders to compare the performance of the business with past years and other companies.
what does gross profit margin tell us
profit a business makes on its sales minus the cost of goods sold.
It is the percentage of gross profit made on sales.
what does net profit margin tell us
the percentage of net profit made on sales taking into account expenses.
If the net profit margin is too low then it will usually be because
expenses are too high.
The business will then look at reducing expenses to improve the net profit margin.
what does mark up tell us
It shows what percentage is added to the cost of
goods sold to reach the selling price.
For example, a mark up of 20% would mean that
if the cost of raw materials used to produce a
product were £1, then the product would be sold
for £1.20 as it has been marked up by 20%.
what does return on capital employed tell us
shows if the managing director is doing their job properly.
percentage return the business is making in relation to the capital invested.
what do profitability ratios show
Profitability ratios show how efficiently a company generates profit and value for
shareholders.
