Study Tip #1 - Confirm answers using a calculator

This is probably a very common sense thought, but sometimes we find ourself with a question in particular that is so easy we do not need a calculator.  

Do not fall for this!  Double check your assumptions with your calculator.  

Remember: That 1 incorrect answer may be the difference between pass or fail.

 

Profitability Ratios #2: Profit Margin (Gross & Net)

Profit Margin

Measures the profit genereted from sales (per £ of sales)

The Formula

 

 

Depending on what information you have available to you will determine how you calculate the top line of the equation.

Gross profit can be:

EBIT + Admin Expenses
Operating Profit + Admin Expenses
Turnover – Cost of Sales
Gross Profit


Net Profit can be:

Gross Profit – Admin Expenses
EBIT
Operating Profit
Net Profit



Example

Balance Sheet

Turnover

200m

Cost of Sales

157m

Gross Profit

70m

Administration expenses

20m

Operating Profit (Earnings before interest and taxes)

50m

Solution

Gross Profit Margin

Net Profit Margin

 

Profitability Ratios #2: Asset Turnover

Asset Turnover

The measure of how efficiently the company's assets are working. 

Formula

Example

Balance Sheet

Sales or Turnover
230,000

Fixed Assets
100,000

Current Assets
50,000

Current Liabilities (under 1 year)
25,000

Solution