Profit Margin and ROCE Flashcards
What is net profit margin?
Net profit margin measures the profit made by the business after all expenses have been deducted, expressed as a percentage of revenue.
Why is net profit margin important?
It is a more accurate measure of efficiency and performance than gross profit margin because it accounts for all expenses.
What action might a business take if net profit margin falls?
The business may take steps to reduce its expenses to improve profitability.
What is the formula for net profit margin?
NetProfitMargin=
(Net Profit/Revenue) x 100
What is Return on Capital Employed (ROCE)?
ROCE measures the return on capital as a percentage of the capital employed, showing how efficiently a business uses its invested money.
Why is ROCE important?
A high profit from a low investment indicates that the business is performing well.
What is the formula for ROCE?
ROCE = (NetProfitBeforeInterest andTax/Capital Employed) x 100
Net Profit Exam Q1: A business has sales revenue of £90,000 and expenses (e.g., rent, rates, and wages) totaling £60,000. Calculate the net profit margin. Show your working.
Step 1: Calculate net profit = Net Profit = Revenue - Expenses = 90,000 − 60,000 = 30,000
Step 2: Use the net profit margin formula: NetProfitMargin = (Net Profit/Revenue) x 100
Step 3: Substitute the values: NetProfitMargin = (30,000/90,000) x 100 = 33.33%
The net profit margin is 33.33%, meaning for every £1 of sales, the business makes 33p in net profit.
ROCE Exam Q2: Two business owners invest £120,000 into a new business. In the first year, the business shows a net profit before interest and tax of £440,000. Calculate the ROCE. Show your working.
Step 1: Use the ROCE formula: ROCE = (Net Profit Before Interest and Tax/Capital Employes) x 100
Step 2: Substitute the values: ROCE = (440,000/120,000) x 100 = 366%
The ROCE is 366%, meaning for every £1 of capital invested, the owners received £3.66 in profit, showing a highly efficient use of capital.
