Ratio Formula What type Explanation Evaluation points - it depends
of ratio is
it?
Gross profit Gross profit / revenue x 100 Profitability The total profit a company makes after deducting - The objectives of the business
margin ratio costs. A company can increase its gross profit e.g. if their main objective is a
margin by 1) reducing operations costs without more social stance they won't
lowering sales prices 2) increase prices without be focusing on increasing
increasing the cost of doing business 3) improve their gross profit margins
productivity 4) relying on its existing customers to - The type of business e.g.
increase is average order value not-for-profit businesses
don't run for the sole purpose
of making a profit
- Price elasticity of demand e.g.
a positive price elasticity of
demand can impact the ability
of a business increasing their
prices
Operating Operating profit / revenue x 100 Profitability The percentage of profit a company produces from - The type of product the
profit ratio its operations before subtracting taxes / investment business sells e.g. luxury
margin charges. The profit the business makes after paying goods won't be sold as
its operations costs. The higher the operating frequently as necessities
margin the more revenue they are generating. - Depends on the industry and
whether they have high
expenses e.g. debt
- The type of management in
the business and how they are
leading operations
- How efficient the business
resources are being used
- On the prices the business
sells its products on
of ratio is
it?
Gross profit Gross profit / revenue x 100 Profitability The total profit a company makes after deducting - The objectives of the business
margin ratio costs. A company can increase its gross profit e.g. if their main objective is a
margin by 1) reducing operations costs without more social stance they won't
lowering sales prices 2) increase prices without be focusing on increasing
increasing the cost of doing business 3) improve their gross profit margins
productivity 4) relying on its existing customers to - The type of business e.g.
increase is average order value not-for-profit businesses
don't run for the sole purpose
of making a profit
- Price elasticity of demand e.g.
a positive price elasticity of
demand can impact the ability
of a business increasing their
prices
Operating Operating profit / revenue x 100 Profitability The percentage of profit a company produces from - The type of product the
profit ratio its operations before subtracting taxes / investment business sells e.g. luxury
margin charges. The profit the business makes after paying goods won't be sold as
its operations costs. The higher the operating frequently as necessities
margin the more revenue they are generating. - Depends on the industry and
whether they have high
expenses e.g. debt
- The type of management in
the business and how they are
leading operations
- How efficient the business
resources are being used
- On the prices the business
sells its products on
