# Ratio Analysis

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Revision Presentation

Learning Objectives

All students will understand the formula for Gross Profit Margin and Net Profit Margin Ratios Most students will understand the connection between the ratios Some students will understand how to confidently answer an exam question on profitability

Introduction

A ratio is a measure of one piece of information in terms of another

Profit and Profitability

Profit is an absolute measure – it equals sales revenue less costs Profitability is a relative measure – it shows amount of profit “relative” to what created profit

Mark Scheme
       

Out of 12 marks (Foundation Paper) 10 - 12 marks 6 - 9 marks 4 - 6 marks 0 - 3 marks Well done! =C =D =E =F

Gross Profit Margin

Calculation

 

Gross profit Sales

*

100 =

x%

Why it might increase/ decrease?

Think of the connection:
 Gross Profit = Sales – Cost of Sales 

Gross Profit Margin

Gross Profit Margin

Gross Profit Margin

Net Profit Margin

Net Profit Margin

Gross profit = Sales Revenue – Cost of Sales

Arcadia Ltd has a gross profit of £4000 for the first year of business, and sales revenue of £10,000. In its second year it has gross profit of £4000 and sales revenue of £12,000.
Calculate the ‘Cost of Sales’ figures for both years.  What conclusions can Arcadia make from knowing these figures?  What do you recommend Arcadia seek to do for year three?