Ratio Analysis 1: Profitability

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/