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6. Finance
6.4 Analysing the financial performance of a business
Calculating profitability ratios:
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Cards (31)
What does the Gross Profit Margin measure?
Product/service profitability
What is the scope of the Net Profit Margin?
Overall business profitability
The Return on Assets (ROA) measures profitability relative to total
assets
Order the steps to calculate profitability ratios:
1️⃣ Gather necessary financial data
2️⃣ Identify the relevant ratios
3️⃣ Learn the formula for each ratio
4️⃣ Calculate the ratios using financial data
5️⃣ Interpret the calculated ratios
The Net Profit Margin formula uses Gross Profit in its calculation.
False
The margin formula is
Net Profit
divided by Sales Revenue and multiplied by 100.
The Gross Profit Margin shows the percentage of sales revenue remaining after deducting the cost of goods
sold
The Gross Profit Margin formula is
Gross Profit
divided by Sales Revenue and multiplied by 100.
What is the Return on Assets (ROA) of a company with Net Profit of $100,000 and Total Assets of $1,000,000?
10%
A Net Profit Margin of 20% means the company retains 20 cents of
every dollar
of revenue after all costs.
True
Profitability ratios are financial metrics that measure a business's ability to generate
profit
The Gross Profit Margin considers all expenses, including interest and taxes.
False
What does the Return on Equity (ROE) measure?
Return for shareholders
The income statement provides data for calculating shareholders' equity.
False
What does the Gross Profit Margin formula measure?
Product/service profitability
Match the profitability ratio with its description:
Gross Profit Margin ↔️ Measures product/service profitability
Net Profit Margin ↔️ Measures overall business profitability
Return on Equity (ROE) ↔️ Measures return for shareholders
Return on Assets (ROA) ↔️ Measures profitability relative to total assets
What does the Return on Assets (ROA) measure?
Profitability relative to assets
The income statement provides data for shareholders' equity and total assets.
False
Steps to calculate Gross Profit Margin
1️⃣ Determine Gross Profit
2️⃣ Determine Sales Revenue
3️⃣ Apply the formula:
G
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\frac{Gross Profit}{Sales Revenue} \times 100
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G
ross
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×
100
The Return on Equity (ROE) formula uses Net Profit and Shareholders' Equity.
True
What does a low Net Profit Margin compared to a high Gross Profit Margin indicate?
High operating expenses
The Net Profit Margin measures profitability after deducting all
expenses
Match the profitability ratio with its formula:
Gross Profit Margin ↔️ (Gross Profit / Sales Revenue) x 100
Net Profit Margin ↔️ (Net Profit / Sales Revenue) x 100
Return on Equity (ROE) ↔️ (Net Profit / Shareholders' Equity) x 100
Return on Assets (ROA) ↔️ (Net Profit / Total Assets) x 100
From which financial statement is Net Profit obtained?
Income Statement
The formula for Gross Profit Margin is
\frac{Gross Profit}{Sales Revenue} \times 100</latex>
What financial metric is used in the numerator of the ROE formula?
Net Profit
The
Return on Equity (ROE)
measures the return generated for shareholders.
True
Match the profitability ratio with its formula:
Gross Profit Margin ↔️
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100
\frac{Gross Profit}{Sales Revenue} \times 100
S
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G
ross
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100
Net Profit Margin ↔️
N
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\frac{Net Profit}{Sales Revenue} \times 100
S
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N
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×
100
Return on Equity (ROE) ↔️
N
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h
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×
100
\frac{Net Profit}{Shareholders' Equity} \times 100
S
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Eq
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N
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×
100
Return on Assets (ROA) ↔️
N
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P
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f
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T
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A
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×
100
\frac{Net Profit}{Total Assets} \times 100
T
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×
100
What does the Net Profit Margin measure?
Overall profitability after expenses
A company with a Gross Profit Margin of 50% retains 50 cents of every
dollar
of sales revenue after deducting the cost of goods sold.
A high Gross Profit Margin suggests efficient production and cost
management
.