Gross Profit Margin

1
Gross Profit Margin
Remember Turnover Sales Gross Profit
Turnover - Cost of Sales The gross profit margin
ratio tells us the profit a business makes on its
cost of sales, or cost of goods sold. It is a
very simple idea and it tells us how much gross
profit per 1 of turnover our business is
earning. Gross profit is the profit we earn
before we take off any administration costs,
selling costs and so on. So we should have a much
higher gross profit margin than net profit
margin. Here are a few examples of the gross
profit margins from different businesses
The gross profit margins vary from business to
business and from industry to industry. For
example, the international airline has a gross
profit margin of only 5.62 yet the accounting
software business has a gross profit margin of
89.55. If a company's raw materials and factory
wages go up a lot, the gross profit margin will
go down unless the business increases its selling
prices at the same time.
2
Net Profit Margin
Net Profit Margin Net Profit
100 Turnover
Remember Net Profit Gross Profit
Expenses The net profit margin ratio tells us
the amount of net profit per 1 of turnover a
business has earned. That is, after taking
account of the cost of sales, the administration
costs, the selling and distributions costs and
all other costs, the net profit is the profit
that is left, out of which they will pay
interest, tax, dividends and so on.
Just like the gross profit margins, the net
profit margins also vary from business to
business and from industry to industry. When we
compare the gross and the net profit margins we
can gain a good impression of their
non-production and non-direct costs such as
administration, marketing and finance costs. We
saw that the international airline's gross profit
margin was the lowest of this group of eight
businesses at only 5.62 but its net profit
margin is 4.05, only a little bit lower than its
gross profit margin. On the other hand, the
discount airline's gross profit margin is 27.46
but its net profit margin is a lot less than that
at 10.87. These comparisons give us a great
insight into the cost structure of these
businesses. Look at the software business too, a
very high gross profit margin of 89.55 but a net
profit margin of 27.15. This is still high, but
we can now see that the administration and
similar expenses are very high whilst its cost of
sales and operating costs are relatively very low.
3
Comparing Gross V Net Ratio

• Why has International airline ratio only fallen
  by 1.6 while the discount airline fallen by 17?
• What reason should manufacturing fall to a
  negative ratio?
• Which industry has the largest fall in gross to
  net ratio?
• Which industry has the smallest fall in gross to
  net ratio?

4
ROCE.

• Key issue to consider with ROCE ratio
• Could we have earned more money (profit) if we
  had invested in a different business or simply
  put our money in the bank?
• To know this you will need to know interest rates
  available at banks