Profitability Ratios

Ratio analysis: a way to analyse the financial performance of a business. Three things:

• Gross profit margin
• Profit margin
• Return on capital employed (ROCE) $\text{gross profit margin}=\frac{\text{gross profit}}{\text{sales revenue}}\times 100$
• Net profit: gross profit - overhead costs
• You want a high gpm
• How to get a higher GPM:
  • Increase sales revenue and reduce direct costs
    • i.e. launching products with higher gross profit margin
    • Reduce price of product and sell at a higher volume
    • Outsource production to places where labour is cheap Profit margin ratio: $\text{profit margin}=\frac{\text{profit before interest and tax}}{\text{sales revenue}}\times 100$ Profit: financial surplus after the payment of all overhead costs. How to increase profit margin: reduce overhead costs
• Insurance, lease payments, mortgage payments, phone+internet, rent, salaries for cost centers, utility bills
• Return on capital employed
• Measures the profitability when compared to its size (value of employed capital)
• 
• how much money you get for the capital expenditure in a product (kind of)
• How to improve ROCE:
  • increase sales revenue
  • Reduce cost of production
  • Sell unproductive, unused, underused, and obsolete assets (to improve operational efficiency) Non-current liabilities: long term debts of an organization that’s raised through loan capital (such as mortgages and long term borrowing)