Basic Profitability
First some basic profitability equations:
Gross Profit Margin | = | Gross Profit | * 100 |
Turnover |
Operating Profit Margin | = | Operating Profit | * 100 |
Turnover |
Net Profit Margin | = | Net Profit | * 100 |
Turnover |
Retained Profit Margin | = | Retained Profit | * 100 |
Turnover |
Profit Mark up | = | Profit | * 100 |
Cost |
What are you going to do if someone asks you to tell them whether a business is profitable or not?
Firstly, do you remember what profit is? Profit is the difference between turnover, or sales, and costs: that is,
profit = turnover - costs
One problem is that there are several ways of measuring profit: gross profit; net profit before and after taxation; and retained profit are just some of them. So, you didn't print out those Tesco accounts we showed you did you? Well, look back at them to remind yourself of all these names for profit
A profit margin is one of the profit figures we just mentioned shown as a percentage of turnover. They always tell us how much profit, on average, our business has earned per £1 of turnover.
We already know from the ratios table that there are several ratios we could use to calculate the profitability of a business. Next we'll discuss gross and net profit margins.
Advanced Profitability
First some advanced profitability equations:
PBIT | = | Profit before Interest and Taxation | * 100 |
Turnover |
PBT | = | Profit for the Year | * 100 |
Turnover |
Profit for the Year Margin | = | Net Profit | * 100 |
Turnover |
Administration costs % | = | Administration costs | * 100 |
Turnover |
Interest costs % | = | Interest costs | * 100 |
Turnover |
Overhead costs % | = | Total Overhead Costs | * 100 |
Cost |
Who uses these Profitability Ratios?
Look back at the table of users and what they use to see who might use a profitability ratio... now think about why they use them and what the results tell them.
Use the Profitability Ratios 2: more advanced
Now that we have worked through some of the basic profitability ratios, let's sharpen our pencils and get our calculators out and do some more advanced analysis...
Source:
http://www.bized.co.uk/
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