Profitability Ratio

• Can be used to evaluate the business' buying policy, the selling price, the cost of buying inventory and the level of expenses in the business.
• Gross Profit Ratio:

  Gross Profit/Sales(Turnover) x 100
• Gross Profit Ratio:

  Purpose:

  To measure the percentage of profit earned on the trading activities of the organisation.
• Gross Profit Ratio:

  How to improve it:

  • Increase selling price as long as volume of sales not affected.
  • Promotional campaigns e.g. advertising to attract customers.
  • Find cheaper suppliers to reduce cost of raw materials.
  • Buy in bulk to receive discounts.
• Profit for the Year Ratio:

  Profit for the Year/Sales x 100
• Profit for the Year Ratio:

  Purpose:

  To measure the percentage of overall profit of the firm after all expenses have been taken into account.
• Profit for the Year Ratio:

  How to improve it:

  • Try to improve the Gross Profit percentage.
  • Identify any expenses that can be reduced.
• Profit Mark-Up Ratio:

  Gross Profit/ Cost of Goods Sold x 100
• Profit Mark-Up Ratio:

  Purpose:

  To measure the percentage added to the cost of goods as profit.
• Profit Mark-Up Ratio:

  How to improve it:

  • Try to negotiate discounts from existing suppliers.