Profitability (A level BS)
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Profitability Ratios
Gross Profit Margin
GROSS PROFIT FOR THE YEAR/SALES FOR THE YEAR x 100 = GROSS PROFIT MARGIN
This percentage relates the trading profit to sales. Generally speaking this percentage should remain steady from year-to-year, and any wide variation from one year to the next will need to be investigated. There is no norm for this percentage: a business working on a high mark up will obviously show a higher gross profit percentage.
Net Profit Margin
NET PROFIT FOR THE YEAR/SALES FOR THE YEAR x 100 = NET PROFIT MARGIN
This percentage shows the net profit of the business in relation to its sales. Press releases of company profits are often the net pre-tax profits. The owner(s) of a business will want to see a steady increase in this figure over the years, and any fall will be critically investigated to see which item is the cause for the problem.
Return On Capital Employed
NET PROFIT FOR THE YEAR/CAPITAL EMPLOYED x 100 = % RETURN ON CAPITAL EMPLOYED
(We tend to compare this with interest rates that you might receive from a bank). This indicator relates the profitability of the business to the size of the capital, and show the owner(s) how much profit is being made on the investment. The owner(s) would hope that this percentage will at least equal the return on, say, a building society account. Capital employed normally includes long term loans and , in the case of a limited company, share capital, reserves and long term loans.
