Profitability Ratios
- Created by: lineventer
- Created on: 29-09-20 17:17
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- Profitability Ratios
- Definition
- Assess how successful management has been at converting sales revenue, gross and net profit
- Performance of company and management
- Types
- Gross Profit Margin: GP/SR x 100
- Net Profit Margin: NP/SR x 100
- Return on Capital Employed: NP/CE x 100
- Capital Employed: (FA + CA) - CL or NCL + SE
- Increase Profit Margins
- Increase Gross and Operating Profit
- Use cheaper materials
- Cut labour costs by relocating production to low-labour cost countries
- Cut labour costs by increasing productivity through automation production
- Cut wage costs by reducing worker's pay
- Evaluation
- Perception of quality can be damaged
- Quality may be at risk - communication problems for factories
- Purchasing machinery increases overhead costs, staff need retraining - short term profits are cut because of these costs
- Motivation levels fall
- Total profit could fall if customers go to competitors
- Low retail costs - cheaper area affects business image
- Cut promotional costs sales could potentially fall
- Fewer managers or lower salaries reduce efficient operations
- Definition
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