Interpreting profitability ratios:

• What does the Gross Profit Margin indicate?

  Sales efficiency
• What does the Net Profit Margin measure?

  Overall profitability
• What does a higher Gross Profit Margin indicate?

  Greater efficiency
• What does a higher ROCE indicate?

  Effective capital use
• Profitability ratios measure a company's ability to generate earnings compared to its revenue
• The Net Profit Margin indicates overall profitability after all costs are accounted for.


  True
• The Gross Profit Margin formula measures a company's efficiency in converting sales into gross profit.
• What does the Net Profit Margin measure?

  Overall profitability after all costs
• A higher ROCE indicates better operational efficiency and financial health.

  True
• What insight is gained by comparing profitability ratios across time?

  Identify trends in efficiency
• Initiatives to improve operational efficiency can increase the amount of revenue converted into gross profit
• The Net Profit Margin is calculated by dividing net profit by revenue
• The Gross Profit Margin is calculated using gross profit and revenue
• The Net Profit Margin measures overall profitability after all costs
• Match the comparison with the insight gained:

  Profitability ratios over time ↔️ Identify trends in efficiency

  Profitability ratios across competitors ↔️ Assess relative performance
• What does a higher Net Profit Margin suggest?

  Better expense management
• A higher Net Profit Margin indicates the company is more efficient at managing all expenses
• Match the profitability ratio with its indication:

  Gross Profit Margin ↔️ Efficiency in converting sales into gross profit

  Net Profit Margin ↔️ Overall profitability after all costs

  Return on Capital Employed (ROCE) ↔️ How effectively capital is used to generate profit
• Fluctuations in costs can significantly impact profitability ratios.


  True
• How can a business use profitability ratios to identify areas for improvement?

  Track changes in ratios over time
• Profitability ratios measure a company's ability to generate earnings compared to its revenue
• Steps to calculate Gross Profit Margin

  1️⃣ Identify Gross Profit

  2️⃣ Identify Revenue

  3️⃣ Divide Gross Profit by Revenue

  4️⃣ Multiply by 100
• The Gross Profit Margin formula is (Gross Profit / Revenue) x 100

  True
• The ROCE measures how effectively capital is used to generate profit.

  True
• Comparing profitability ratios across competitors helps assess relative business performance.


  True
• What does the Gross Profit Margin measure?

  Sales efficiency
• What is the formula for Gross Profit Margin?

  (Gross Profit / Revenue) x 100
• The ROCE measures how effectively a company uses its capital to generate profits.

  True
• What does the Return on Capital Employed (ROCE) measure?

  How effectively capital generates profits
• Comparing profitability ratios over time helps identify trends
• The Return on Capital Employed (ROCE) can help assess how effectively a company is using its capital