Ratio Analysis Flashcards
What is gross profit
The difference between sales revenue and costs of sales
What is the formula for gross profit margin
Gross profit / revenue X 100
What does a fall in GPM mean for a business
- costs of sales has increased
- suppliers charging higher prices (due to exchange rates)
- charging lower prices
- selling more low margin products
What does a incresde in GPM mean
- benefiting from E.O.S
- increase in selling price with same level of output
What does GPM help with
- shows how effiencent a business is in price and producing
- comparing trends = informing management to make better decisions
How to increase GPM
- technical economies of scale = more capital less labour = reduce direct costs per unit = reduce cost of sales
What is operating profit
The difference between revenue, cost of sales and operating expenses
What is the formula for operating profit
Operating profit / revenues X 100
What does it mean if there is a fall in OPM
- GPM has fallen aswell
- Higher operating costs
What does an increase in OPM mean for the business
- GPM has improved
- business has better control over operating costs
Formula for operating profit
Rev/turnover - cost of sales - operating expenses
How to increase OPM
- decrease marketing costs
- ## make salary reductions
Profit for the year formula
Profit for the year / revenue X 100
What does Prof for the year tell us
- how good a business is at converting sales to profit
- compare trends/ rivals
- useful for internal/ external stakeholders looking for investment
