Knowledge clip, profitability
Ratio categories
Profitability
Efficiency
Liquidity
Financial gearing (solvency)
Profitability
Profit
Often very important for an organization even if you are a non-profit making organization, you need
a certain amount of income to survive.
Profit is often an important figure for management.
Profitability ratios give an insight in the amount of profit compared to for example, the amount of
revenues. Furthermore, they also show a company and also its stakeholder’s performance. The
company’s turnover and profit levels are examined to see how the income has been used and what is
left. So what is coming in so for example how high are the revenues and what is left? So how high is
the profit that we made? Was it high or low etcetera? Which can help to review how the company is
managed, specifically through its costs. So, it could be that you revenue is quite high but the eventual
profit is quite low. So maybe you did something wrong in your costs, they could be too high. And
lastly, it can help other stakeholders see if they company has a problem with its efficiency. This
because the stakeholders can look into their statements, so then stakeholders can decide how the
company is doing.
Profitability ratios
Return on Capital Employed (ROCE)
(Operating profit/ share capital + reserves + non-current liabilities) x 100%
Note: the share capital + reserves + non-current liabilities is the amount of what is invested in the
company.
Operating profit margin
(Operating profit / sales revenue) x 100%
Gross profit margin
(Gross profit/ sales revenue) x 100%
Things you can ask yourself are:
Is our profitability increasing? Why (not)?
How are we doing compared to competition?
Connection between the ratios? If operating profit margin goes up but the gross profit
margin goes down?
Ratio categories
Profitability
Efficiency
Liquidity
Financial gearing (solvency)
Profitability
Profit
Often very important for an organization even if you are a non-profit making organization, you need
a certain amount of income to survive.
Profit is often an important figure for management.
Profitability ratios give an insight in the amount of profit compared to for example, the amount of
revenues. Furthermore, they also show a company and also its stakeholder’s performance. The
company’s turnover and profit levels are examined to see how the income has been used and what is
left. So what is coming in so for example how high are the revenues and what is left? So how high is
the profit that we made? Was it high or low etcetera? Which can help to review how the company is
managed, specifically through its costs. So, it could be that you revenue is quite high but the eventual
profit is quite low. So maybe you did something wrong in your costs, they could be too high. And
lastly, it can help other stakeholders see if they company has a problem with its efficiency. This
because the stakeholders can look into their statements, so then stakeholders can decide how the
company is doing.
Profitability ratios
Return on Capital Employed (ROCE)
(Operating profit/ share capital + reserves + non-current liabilities) x 100%
Note: the share capital + reserves + non-current liabilities is the amount of what is invested in the
company.
Operating profit margin
(Operating profit / sales revenue) x 100%
Gross profit margin
(Gross profit/ sales revenue) x 100%
Things you can ask yourself are:
Is our profitability increasing? Why (not)?
How are we doing compared to competition?
Connection between the ratios? If operating profit margin goes up but the gross profit
margin goes down?
