3.5-3.6 Ratio analysis
Improving Gross Profit Margin
| lowering prices | increases the sale and the sales revenue | only works if the company achieves economies of scale to afford to lower costs of production |
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| increasing prices | increases sales revenue especially if there is little competition and the customers are loyal | in a competitive market, sales will decline significantly reducing both sales revenue and GMP |
improving Net Profit Margin
reducing expenses:
- rent: they could move to another premise or negotiate lower rent prices in the current premise.
disadvantage: there could be less efficient machinery in the new premise or it could be in a less convenient place for customers.
- electricity: they can monitor the use of electricity or use an alternative, cheaper source of energy, but they have to make sure not to offer lower quality products after these changes
- stationery: relying on digital documents instead of paper will decrease the money spent on stationery, however, it could increase the electricity cost.
improving Return on Capital Employed
| reduce COGS for a higher net profit | negotiate lower rental prices, improving quality management and stock control will reduce the cost of sales leading to a higher net profit |
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| increase sales revenue for a higher net profit | with promotion, advertising or offering new products the sales revenue will increase (hopefully more than the cost of sales with this strategy) |
improving current ratio
| selling unused fixed assets: | for example, old trucks or machinery may bring profit to the company, | it’s important not to sell assets needed by the company to produce efficiently |
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| increasing sales revenue: | with promotions or lower prices to sell more products, or the business could improve the revenue per unit by increasing the price. this will bring more money into the business, | it is not certain whether the sales will improve or not with this method. |