Profitability ratios
Profitability ratios measure how much profit an organisation makes.
Gross Profit Percentage Ratio
Gross Profit Percentage Ratio works out the amount of profit from the buying and selling of goods before all other expenses are deducted.
The formula is: (Gross Profit/Sales Revenue) x 100
Two ways of improving this is to:
- raise the selling price of the product
- negotiate deals with less expensive suppliers
Profit for the Year Percentage
Profit for the Year Percentage works out the amount of profit made once all expenses are deducted.
The formula is: (Profit for the Year/Sales Revenue) x 100
Ways of improving this is to:
- decrease expenses, for example finding cheaper premises to rent
- increase the gross profit figure
Return on Equity Employed
Return on Equity Employed is the ratio often used by An investor who either provides capital to startup ventures or supports small companies that wish to expand. or investors such as the Dragons in Dragons鈥 Den.
This ratio calculates how much money an investor will get back after a period of time.
It is crucial that investors weigh up the amount they will receive from the investment with the risk involved and if they would have received as good a deal (or better) if they had left the money in a bank account accumulating Interest is the annual charge for borrowing money. It is usually expressed as a percentage of the total borrowed.
The formula is: (Profit for the Year/Opening Equity) x 100
Two ways of improving this is to:
- increase sales
- reduce expenses