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Business resources M3

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Profitability ratios Profitability ratio measures whether a business is profitable and how much profit the business is making. Gross Profit margin The gross profit is the profit made by the business by just taking into account the direct purchases that the business made to get the goods to the customer. Formula Gross profit/sales revenue x 100 Working out - �657,500/�845, 500 x 100 Answer = 77.76 This means that for every �1 of sales revenue, �0.77 remains after all direct expenses has been deducted. This money contributes towards covering the other expenses of the business. Net profit margin The net profit is the profit the business has made after deducting the expense and tax. ...read more.


So this means that the business makes a net profit of 41.37 percent after deducting all the expenses. Return on capital employed Return on capital employed measure the level of profit compared to the value of net assets invested in your business Formula - Net profit/capital employed x 100 Working out - 349,810/1,600,000 x100 Answer = 21.86% This means that the company is making 22 % on the money they have invested in the company i.e. return on capital employed ratio. This indicates that the business is utilising its assets wisely has it has a high figure. Sales to cost of sales Formula - sales/cost of sales Working out - 845,500/188,000 Answer = �4.49 This means that out of every 1 pound of cost of sakes the business is making �4.49 of sales. ...read more.


However, care must be taken when comparing the stock turnover ratio of different businesses, since a supermarket, for example, is likely to have much higher stock turnover. Debtor's day ratio This shows how long, on average a business takes to collect the debts owed to it by its customers who have purchased their good on credit. Formula Debtors/sales turnover x 365 Working out - 34,981/845,500 x 365 Answer = 15 days This means that on average it takes the business 15 days to collect its trade debts. This is a good sign of the business keep on track of its debtors and collecting it quickly enough. ?? ?? ?? ?? Abdulaziz Omar Unit 2 - Investigating Business Resource ...read more.

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