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Finance
6.4 Analysing the financial performance of a business
Calculating profitability ratios:
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Cards (54)
What are profitability ratios used to evaluate?
Company's ability to generate profit
ROCE measures the return generated for each
dollar
invested in the business.
True
What does Gross Profit Margin reflect about a business?
Pricing strategies and cost management
What does Net Profit Margin measure?
Overall profitability
Gross Profit Margin reflects a business's
pricing
strategies and cost management.
True
ROCE is calculated as (Net Profit / Capital Employed) x
100
What is the revenue in the provided financial data?
100
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What does Net Profit Margin measure?
Overall profitability
ROCE measures the return generated for each dollar
invested
in the business.
Gross Profit Margin
measures the percentage of revenue remaining after deducting the
COGS
What does Gross Profit Margin indicate about a business?
Efficiency in production and pricing
Match the profitability ratio with its formula:
Gross Profit Margin ↔️ (Gross Profit / Revenue) x 100
Net Profit Margin ↔️ (Net Profit / Revenue) x 100
ROCE ↔️ (Net Profit / Capital Employed) x 100
Return on Capital Employed (ROCE)
measures the return generated for each dollar
invested
Return on Capital Employed (ROCE)
indicates how effectively
capital
is used to generate profit.
What does Net Profit Margin measure after deducting all expenses?
Overall profitability
Gross Profit Margin
indicates efficiency in production and pricing.
True
Gross Profit Margin measures revenue remaining after subtracting the Cost of Goods Sold (COGS) and reflects
pricing
strategies.
What does Gross Profit Margin measure in terms of expenses?
Revenue after COGS
Gross Profit Margin reflects a business's
pricing strategies
and cost management.
True
What is the formula for calculating Gross Profit Margin?
(
G
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×
100
(Gross\ Profit / Revenue) \times 100
(
G
ross
P
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×
100
What does Return on Capital Employed (ROCE) measure?
Effectiveness of capital utilization
Net Profit Margin reflects overall profitability after all
expenses
are deducted.
True
Net Profit Margin
is calculated by dividing net profit by
revenue
Arrange the steps in calculating Gross Profit Margin:
1️⃣ Calculate Gross Profit
2️⃣ Divide Gross Profit by Revenue
3️⃣ Multiply by 100
Gross Profit Margin indicates the overall profitability of a business.
False
Match the profitability ratio with its significance:
Gross Profit Margin ↔️ Efficiency in production and pricing
Net Profit Margin ↔️ Overall profitability
ROCE ↔️ Return on invested capital
What does Return on Capital Employed (ROCE) measure?
Return on invested capital
Net Profit Margin reflects overall profitability after all
expenses
Gross Profit Margin reflects overall profitability after all expenses.
False
Net Profit Margin measures revenue after all operating expenses,
interest
, and taxes.
True
Gross Profit Margin reflects efficiency in production and
pricing
strategies.
The Gross Profit Margin measures the percentage of revenue remaining after deducting the cost of goods
sold
Using the provided data, the Gross Profit Margin is
60%
Steps to calculate Gross Profit Margin, Net Profit Margin, and ROCE using sample financial data
1️⃣ Gross Profit Margin:
G
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100
\frac{Gross\ Profit}{Revenue} \times 100
R
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G
ross
P
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×
100
2️⃣ Net Profit Margin:
N
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P
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f
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R
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×
100
\frac{Net\ Profit}{Revenue} \times 100
R
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N
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t
P
ro
f
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×
100
3️⃣ ROCE:
N
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t
P
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f
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C
a
p
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t
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E
m
p
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×
100
\frac{Net\ Profit}{Capital\ Employed} \times 100
C
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p
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E
m
pl
oye
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N
e
t
P
ro
f
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×
100
The Net Profit Margin shows overall profitability after all
expenses
What does a Gross Profit Margin of 60% suggest about a company?
Efficient management of COGS
What expenses are deducted to calculate Net Profit Margin?
All expenses, interest, taxes
If a company has revenue of $1,000,000 and COGS of $600,000, what is its Gross Profit Margin?
40%
A higher Gross Profit Margin indicates better management of COGS.
True
What is the ROCE calculated using the provided data?
30%
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