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What are the 3 Profitability Ratios?
Gross profit margin
Operating profit margin
Return on capital employed
What is the Gross Profit Margin tell us?
Relates the gross profit of the business to the sales generated during the same period
Gross profit represents the difference between sales and cost of sales
Normally expressed as a percentage
The ratio is a measure of profitability in buying (or producing) and selling goods or services before any other expenses are taken into account.
What does the Operating profit margin tell us?
Relates the operating profit for the period to the sales during that period.
Represents the profit from trading operations before interest is paid.
Most appropriate measure of operational performance and god for comparison as the way in which the business is financed will not influence the measure.
What does the Return on Capital employe tell us?
Compares the operating profit generated by the business with the (average) finance employed by the business for the period.
This ratio expresses the relationship between the operating profit generated during a period and the average long-term capital invested in the business.
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