Ratio analysis Flashcards
What is gross profit margin
Also known as accounting ratio - the better the performance the higher the GPM
What do accounting ratios allow stakeholders to do
judge how effective a business is being run - profit is the main indicator
How do you calculate GPM
Gross profit / sales ? 100/1= GPM%
Eg 438700/956500 ? 100/1 = 45.8%
what causes variation in GPM between businesses
internal and external factors
Internal factors - size of business, quality of stock control, management of expenses
External factors - level of interest rates , type of industry business is in,
What is net profit an indication of
How profitable the business is overall NPR also known as an accounting ratio
How do you calculate NPM
Net profit/sales ? 100/1 = NPM%
136500?956500 ? 100/1 = 14.2%
How do we judge a good or bad NPM
NPM of 18%+ may be regarded as good, indicating effective business management of cost and expenses
NPM of 10-17% might be viewed as satisfactory, but costs or expenses management could be improved
NPM less than 10% can be regarded was poor , indicating that there are real oportunities for improving cos and expenses management
If figures have been calculated and seem low what should managers do
Look for the main causes of poor performance eg are costs of sales high which would lead to a low GPM which may lead to a low NPM