Profitability Ratios

Question 1

What are Profitability Ratios?

Answer 1

A way to make sense of Profit and loss accounts

Question 2

What are Profit Margins?

What are the two types?

Answer 2

Show what happens to each pound spent by a customer

• Gross Profit Margin
• Net Profit margin

Question 3

Explain Gross Profit Margins

Answer 3

• They ignore indirect costs
• This is the fraction of every pound spent by customers that doesn’t go directly towards making the product
• Gross profit margin = gross profit / sales (turnover)

Question 4

If Gross Profit was £167,000
& Turnover was £180,000
What was the Profit Margin?

Answer 4

167,000 / 180,000 = 0.9278 or 92.78%

Question 5

Explain Net Profit Margins

Answer 5

• Takes All Costs into account
• The fraction of every pound that is spent by customers that the company gets to keep (after all costs have been paid)
• Net Profit margin = net profit / sales (turnover)

Question 6

If Net Profit was £18,000
& Turnover was £180,000
What was the Net Profit Margin?

Answer 6

18,000 / 180,000 = 0.1 or 10%