Profitability Indicators

Question 1

List the Profitability Indicators

Answer 1

Gross Profit Margin, Net Profit Margin, Asset Turnover, ROA, ROI

Question 2

Define GPM

Answer 2

The gross profit margin is the PERCENTAGE of SALES DOLLARS that is retained as gross profit

Question 3

What is the equation for GPM

Answer 3

Gross Profit Figure / Net Sales

Question 4

Define NPM

Answer 4

The net profit margin is the PERCENTAGE of SALES DOLLARS that is retained as net profit

Question 5

What is the equation for NPM

Answer 5

Net Profit Figure / Net Sales

Question 6

Define Asset Turnover

Answer 6

The asset turnover measures the number of times per year the business is able to use its assets to generate revenue

Question 7

What is the equation for Asset Turnover

Answer 7

Net Sales / Average Total Assets

Question 8

Define Return on Assets

Answer 8

The ROA measures the ability of the business to earn a profit with its assets

Question 9

What is the equation for ROA

Answer 9

Net Profit Figure / Average total assets
AND
Asset Turnover x NPM

Question 10

Define Return on Investment

Answer 10

The ROI measures how effectively the business has used the owners funds to generate a profit

Question 11

What is the equation for ROI

Answer 11

Net profit figure / Average Owners Equity

Question 12

What are strategies to improve the GPM (2)

Answer 12

1. Increase the selling price of the inventory

2. Decrease the cost price of the inventory

Question 13

What are strategies to improve the NPM (4)

Answer 13

1. Increase the selling price to increase the revenue earned per sale
2. Manage staff more effectively by training them or having better wage control
3. Manage Inventory better by reducing inventory loss or write down
4. Find a cheaper supplier but maintain quality

Question 14

What are strategies to improve the Asset Turnover (2)

Answer 14

1. Increase the net sales by decreasing selling price to attract more sales
2. Decrease average total assets by getting rid of idle assets

Question 15

What are strategies to improve the ROA (3)

Answer 15

1. Reduce the average total assets by getting rid of idle assets and monitoring the amount of assets controlled
2. Manage A/C Receivable more effectively to increase net profit and reduce the allowance for doubtful debts
3. Improve expense control through managing inventory or employees more effectively

Question 16

What are strategies to improve the ROI (2)

Answer 16

1. Try to limit capital contributions or loans being taken out to reduce the average capital
2. Improve profit figures by increasing sales revenue or decreasing expenses.