Financial Ratio Analysis - Basic Profitability

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Basic Profitability

First some basic profitability equations:

Gross Profit Margin	=	Gross Profit	* 100
		Turnover

Operating Profit Margin	=	Operating Profit	* 100
		Turnover

Net Profit Margin	=	Net Profit	* 100
		Turnover

Retained Profit Margin	=	Retained Profit	* 100
		Turnover

Profit Mark up	=	Profit	* 100
		Cost

What are you going to do if someone asks you to tell them whether a business is profitable or not?

Firstly, do you remember what profit is? Profit is the difference between turnover, or sales, and costs: that is,

profit = turnover - costs

One problem is that there are several ways of measuring profit: gross profit; net profit before and after taxation; and retained profit are just some of them. So, you didn't print out those Tesco accounts we showed you did you? Well, look back at them to remind yourself of all these names for profit

A profit margin is one of the profit figures we just mentioned shown as a percentage of turnover. They always tell us how much profit, on average, our business has earned per £1 of turnover.

We already know from the ratios table that there are several ratios we could use to calculate the profitability of a business. Next we'll discuss gross and net profit margins.

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