Ratio Analysis 1: Profitability - Net profit margin - Carphone Warehouse profit margin

Now that we know a bit about two profitability ratios, let's see how to use them. Here are parts of the profit and loss account for the Carphone Warehouse plc; we will use that information to calculate its gross and net profit margin.

Carphone Warehouse
Consolidated Profit and Loss Account for the year ended	31 March 2001	25 March 2000
	£'000	£'000
Turnover	1,110,678	697,720
Cost of sales	830,126	505,738
Gross profit	280,552	191,982
Operating expenses	176,960	129,359
Operating profit	66,016	41,389
Other costs/income	6,555	-5,132
Profit before interest and taxation	45,012	25,300

Let's put these ratios in a table:

Profitability Ratios for the Carphone Warehouse
Ratio Name	Ratio Formula	31 Mar 01	25 Mar 00
Profitability	For the year ended 31 Mar 01
Gross Profit Margin	280,552 ÷ 1,110,678*100	25.26%
Net Profit Margin	45,012 ÷ 1,110,678*100	4.05%

Look and see where these figures and ratios came from: don't do anything else until you have agreed with what it is in this table. We won't worry about what these results mean just yet.

Your Turn: Profitability 1

Did you see that for the year ended 25 March 2000, we didn't give you the ratio results?

Well spotted! So, using the profit and loss account above, calculate the gross and net profit margins for the Carphone Warehouse for the year ended 25 March 2000, enter those ratios in the table above.

Did you get this?

Now we have some information to make comments on. The Carphone Warehouse has given us almost the same profitability results for the two years. This suggests the business is being managed in a stable way.

From what we know about the mobile phone industry, we might say that it is good that they have been so stable because the industry has been changing and growing so quickly.

We still can't say, though, whether a gross profit margin of about 25% is good or bad and we can't say whether a net profit margin of around 4% is good or bad: we still need even more information.

There are two ways to tell whether ratio result is good:

• find ratio values for the business we are looking at for three, four or more year, preferably more: this is known as trend analysis;
• find ratio values for other businesses in the same industry: this is known as inter firm comparison

We don't have more than two years' worth of data for the Carphone Warehouse but we do have data for Vodafone, another business in the mobile telephone industry. In the next activity we examine the data for Vodafone ...

Source:
http://www.bized.co.uk/