Calculating profitability ratios:

• 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: $\frac{Gross Profit}{Sales Revenue} \times 100$
• 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 ↔️ $\frac{Gross Profit}{Sales Revenue} \times 100$

  Net Profit Margin ↔️ $\frac{Net Profit}{Sales Revenue} \times 100$

  Return on Equity (ROE) ↔️ $\frac{Net Profit}{Shareholders' Equity} \times 100$

  Return on Assets (ROA) ↔️ $\frac{Net Profit}{Total Assets} \times 100$
• 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.