2 aspects ratios can compare with
-Historical comparison
-Inter-firm comparison
Gross Profit margin ratio
Gross Profit Margin = Gross Profit/sales revenue X 100%
(Net) Profit margin
Net Profit before Interest & Tax/ net sales X 100%
Ways Net Profit margin can be improved
Reducing indirect expenses; economies of scale, reduce waste, fly cheaper
Negotiate cheaper fixed costs; lower rent ect
Ways Gross Profit Margin can be improved
Raising revenue
-Increase prices
-Decrease prices
-New marketing strategies
-Produce/sell products with higher gross margin
Reducing costs
Reduce material costs
Reduce labour costs
What does Gross Profit Margin indicate?
margin of profit available to cover operating expenses and whether mark-up sufficiently generates enough profit
What does Net Profit Margin indicate?
effectiveness of management to minimize expenses per $1 of sales
Why does net profit margin exclude the expenses of interest and tax?
These rates change both historically and internationally meaning they would render comparison inaccurate.
What does ROCE measure?
financial performance of business compared to amount of capital employed (relative to its size)
ROCE formula
Profit before int & tax/ total capital employed X 100%
What is total capital employed?
Non-current Liabilities + Shareholders Equity + Retained Earnings
