INDICATORS
PROFITABILITY
1.gross profit margin -higher is better
Gross profit x 100 -low reasons:
Sales 1.low sales price due to competition
2.higher cost price of stock
3.higher discounts allowed
4.inventory lost
2.gross profit on cost of sales -shows mark-up
Gross profit x 100 -higher is better
Cost of sales -low reasons:
1.low sales price due to competition
2.higher cost price of stock
3.higher discounts allowed
4.inventory lost
3.operating expenses on sales -lower is better as it shows better
Operating expenses x 100 management of costs
Sales -look at individual expenses and comment on
any increases/ decreases in specific costs
4.net profit on sales -higher is better as it shows that a larger
Net profit x 100 percentage of sales is profit
Sales -compare with operating profit on sales to
comment on the effect of interest
EFFICIENCY (working capital cycle)
1.stock turnover rate -number of times stock is replaced in a year
Cost of sales -higher is good as stock is sold more
Average stock regularly
Average stock= (opening stock + closing -higher when stock is perishable
stock) ÷2
2.stock holding period -average time taken to sell stock
Average stock x 365 -lower is better as stock is sold faster and the
Cost of sales holding of stock is often costly
3.debtors’ collection period -average time taken for a debtor to pay their
Average debtors’ x 100 account
Credit sales -lower is better
Average debtors= (opening balance + closing -norm is 30-60 days
balance) ÷2 -suggestions:
1.offer discounts to those who pay quickly
2.increase interest on account
4.creditors’ payment period -average time taken to pay short-term debts
Average creditors’ x 100 -higher is better as this allows more time to
Credit purchases invest
Average creditors= (opening balance + -norm is 30-60 days
closing balance) ÷2
PROFITABILITY
1.gross profit margin -higher is better
Gross profit x 100 -low reasons:
Sales 1.low sales price due to competition
2.higher cost price of stock
3.higher discounts allowed
4.inventory lost
2.gross profit on cost of sales -shows mark-up
Gross profit x 100 -higher is better
Cost of sales -low reasons:
1.low sales price due to competition
2.higher cost price of stock
3.higher discounts allowed
4.inventory lost
3.operating expenses on sales -lower is better as it shows better
Operating expenses x 100 management of costs
Sales -look at individual expenses and comment on
any increases/ decreases in specific costs
4.net profit on sales -higher is better as it shows that a larger
Net profit x 100 percentage of sales is profit
Sales -compare with operating profit on sales to
comment on the effect of interest
EFFICIENCY (working capital cycle)
1.stock turnover rate -number of times stock is replaced in a year
Cost of sales -higher is good as stock is sold more
Average stock regularly
Average stock= (opening stock + closing -higher when stock is perishable
stock) ÷2
2.stock holding period -average time taken to sell stock
Average stock x 365 -lower is better as stock is sold faster and the
Cost of sales holding of stock is often costly
3.debtors’ collection period -average time taken for a debtor to pay their
Average debtors’ x 100 account
Credit sales -lower is better
Average debtors= (opening balance + closing -norm is 30-60 days
balance) ÷2 -suggestions:
1.offer discounts to those who pay quickly
2.increase interest on account
4.creditors’ payment period -average time taken to pay short-term debts
Average creditors’ x 100 -higher is better as this allows more time to
Credit purchases invest
Average creditors= (opening balance + -norm is 30-60 days
closing balance) ÷2
