Unit F

Measuring Profitability :

Ratio analysis allows for a more meaningful interpretation of published accounts by comparing one figure with another.

Ratio analysis also allows for both interfirm and intrafirm comparisons

Interfirm - between different firms

Intrafirm - Within the firm

Gross profit margin :

• Looks at gross profit as a percentage of sales turnover
• If gross profit margin falls from one year to the next or is thought to be too low, a firm may try to reduce the cost of its purchases.
  • May involve looking for a cheaper supplier, but the firm must try to ensure that this does not affect the quality of the product

Mark-up :

• Looks at profit as a percentage of the cost of sales

Net profit margin :

• Looks at net profit as a percentage of sales turnover
• If net profit margin falls from 1 year to the next or is thought to be too low, a firm may look to reuce its expenses
  • Moving to a cheaper premisis or cutting staffing costs

Return On Capital Employed (ROCE) :

• Shows the percentage return a business is achieving from the capital being used to generate that return
• Investors will often compare ROCE to the interest rate being offered in a bank or building society to see if their investment is working effectively for them in…