PROFITABILITY RATIOS

COMPANY A COMPANY B NET PROFIT 10,000 20,000 CAPITAL INVESTED 50,000 100,000 SALES 500,000 200,000 COST OF SALES 110,000 45,000

CALCULATE THE FOLLOWING FOR EACH COMPANY: The Gross Profit The Net Profit Margin The Gross Profit Margin COMMENT ON YOUR FINDINGS!

Improving the GPM Raising sales (by increasing price) Reducing the cost of goods sold (change suppliers)

Improving NPM Reducing expenses Reduce wages Energy efficiency Reduce waste

ROCE Shows the percentage return they are receiving on the money they have invested into their business Net profit x 100 capital invested This should be expressed as a percentage.

NOW GO BACK TO COMPANY A AND B AND CALCULATE THE ROCE FOR BOTH FIRMS NOW GO BACK TO COMPANY A AND B AND CALCULATE THE ROCE FOR BOTH FIRMS. COMMENT ON YOUR FINDINGS!

IMPROVING ROCE We need to improve the net profit generated without investing any more capital ie find ways to make capital work harder.