Profitability Ratio

Gross Profit: Sales – Cost of sales

(A measure of the value we are adding to the bought in materials and services we need to make our product. It can be known as Gross Margin. If direct labour costs are excluded from this calculation it becomes a blunt measure of sales margin)

  • Sales: All monies received from a business transaction
  • Cost of sales: All direct costs associated with fulfilling that transaction. Raw materials and labour costs (A.K.A. COGS)

Operating Profit: Gross Profit – Overheads

(A measure of how efficiently we are running the business before we take account of financial costs and tax)

  • Overheads: All indirect costs associated with fulfilling that transaction. People, building facilities & utilities, cars, mobiles

Net Profit:  Operating Profit – Financial Charges (PBIT or PAT)

(How efficiently we are running the business, before and after taking account of the financing costs and tax)

  • PBIT (Profit Before Interest and Tax)
  • PAT (Profit After Tax)

Return On Equity:  Net Profit / Total Capital and Reserves

(An expression of the profit earned in relation to the capital invested – Also known as Return On Inv)

  • Total Capital and Reserves: A.K.A. The bottom line on your Balance Sheet

Return On Capital Employed: Operating Profit/(Current assets – current liabilities)

(The resulting ratio represents the efficiency with which capital is being utilized to generate revenue.)

Profit Ratio:  Net Income/Net Sales

(How much the enterprise generates for each £ of revenue spent after you account for all the costs of normal operations)

Return on assets ratio: EBIT/Net Operating assets

(This indicates the effectiveness of a company’s utilization of capital)

  • EBIT:  Net profit before interest and tax. Earnings before income tax (same as Operating Profit)

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