# You need to make judgement on each ratio- does it show the business is doing well? Explain why.

by humzah2013hotmailcom (student)

M2:

You need to make judgement on each ratio- does it show the business is doing well. Explain why?

Profitability:

Profitability is a measure of the profit of a firm in relation to another. It allows for a more comprehensive assessment of the performance of a firm by comparing one figure to another. There are three profitability ratios:

• Gross profit percentage of sales: This is calculated using the following formula:

Gross profit            * 100 = 76692.21      *100 = 53.90261

Sales turnover                       142279.22

This ratio looks at gross profit as a percentage of sales turnover, this ratio is often referred to as the gross profit margin. If gross profit margin falls from one year to the next or is thought to be too low, a firm may try to reduce the cost of its purchases. This may involve looking for a cheaper supplier, but the firm must try to ensure that this does not affect the quality the product. Alternatively, it may try to increase sales without increasing the cost of goods sold.

The gross profit made at every £1 made is 53p. It is okay, it is not that bad but the business could do better. It could be made better by looking for cheaper supplier but the quality of the product should be affected.

• Net profit percentage of sales: This is calculated by using the formula:

Net profit             *100= 8978.64       *100 = 6.310577

Sales turnover                 142279.22

This ratio looks at the net profit as a percentage of sales turnovers. This ratio is often referred to as the net profit margin. If net profit margin falls from one year to the next or is thought to be too low, a firm may look to reduce its expenses, for example, by moving to cheaper premises or cutting staffing costs. Before taking any action, however the accountant must try to identify the cause of a falling figure-whether it is related to sales, cost of goods sold or expenses- ...