Profitability ratios

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6 Terms

1
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What is a profitability ratio?

This shows profit margins, to analyse profit by expressing it in percentages.

2
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What are the three types of profitability ratios?

  1. Gross profit margin

  2. Operating profit margin

  3. Return on capital employed (ROCE)

3
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What is the equation for gross profit margin and what does it tell us?

Gross profit/Revenue x100

  • this percentage tell us how much gross profit (pence) a business gets for every £ they get in revenue. E.g. 73% in gross profit means for every £ a business makes in revenues, they receive 73p in gross profit.

4
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What is the equation for operating profit and what does it tell us?

Operating profit/Revenue x100

  • This tell us how much operating profit (pence) the business gets for every £ in sales.

5
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What is the equation for return on capital employed (ROCE)?

Operating profit/(Total equity + non current liabilities) x100

6
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What does ROCE tell us?

  • This tells us how much money is made by a business compared to how much is put into it.

  • The higher the ROCE the better

  • This can be improved by paying off dept to reduce non-current liabilities or by increasing operating profit.

    (Total equity is the money received by the business by selling shares)