Profitability Ratios

• Business Studies
• Further Education (Key Stage 5)

Review Quiz

Before we begin today's class, we're going to review the topic of profit.

Answer the questions as accurately as possible

Choose the correct term.

Sales revenue - cost of sales = ?

1. Operating profit
2. Net profit
3. Gross profit
4. Return on capital employed

Choose the correct term.

Gross profit - operating costs = ?

1. Operating profit
2. Net profit
3. Gross profit
4. Return on capital employed

Choose the correct term.

Operating profit - Interest and Tax = ?

1. Operating profit
2. Net profit
3. Gross profit
4. Return on capital employed

Here is the 2021 financial statement for a textile supplier, Threadz.

What was their 2021 operating profit?

1. £538,000
2. £312,000
3. £632,000
4. £218,000

Here is the 2020 financial statement for fashion retailer Q&B.

What was their net profit in 2020?

1. £1.9m
2. - £1.9m
3. - £1m
4. £0.1m

Profitability ratios

A-level - Business Studies

Lesson objectives

- To contrast between the concepts of profit and profitability

- To calculate returns according to three types of profitability ratio used by businesses

- To interpret a given business' performance using profitability ratios

Rank the companies

- Do you recognise any of the fashion retailers below?

- Discussing in pairs, rank them 1-5 in order of profits made.

Check your answers.

£12.8bn (2018)

£12.3bn (2018)

£9.8bn (2018)

£8.9bn (2018)

£8.6bn (2018)

Profit vs. Profitability

- Profit is an absolute measure of returns earned by a

business, for example: £50,000 (i.e. net profit)

- Profitability is a measure of returns in relation to it's 

size / costs, for example: 35%. (i.e. profit margin)

- Are the companies we looked at earlier ranked by 

profit or profitability?

£12.8bn (2018)

£12.3bn (2018)

£9.8bn (2018)

£8.9bn (2018)

£8.6bn (2018)

Profit vs. Profitability

- Profit is an absolute measure of returns earned by a

business, for example: £50,000 (i.e. net profit)

- Profitability is a measure of returns in relation to it's 

size / costs, for example: 35%. (i.e. profit margin)

- Are the companies we looked at earlier ranked by 

profit or profitability?       PROFIT

£12.8bn (2018)

£12.3bn (2018)

£9.8bn (2018)

£8.9bn (2018)

£8.6bn (2018)

Profit or profitability?

      Do the figures express
       profit or profitability?

What are the profitability ratios?

Type 1 -  Gross Profit Margin

Sales revenue - Cost of sales = Gross profit

x  100  = 

  Gross profit

Sales revenue

Gross profit margin (%)

Check the financial statement for clothing retailer Sergio Giorgini for 2020.

What was their gross profit margin?

Sales revenue	£70,000
Gross profit	£50,000
Operating profit	£30,000
Net profit	£20,000

1. 140%
2. 71%
3. £120,000
4. £50,000

What are the profitability ratios?

Type 2 -  Operating Profit Margin

Gross profit - Operating costs = Operating profit

x 100 = 

Operating profit

 Sales revenue

Operating profit margin (%)

Check the financial statement again.

What was their operating profit margin?

1. £30,000
2. £10,000
3. 43%
4. 41%

What are the profitability ratios?

Type 3 -  Net Profit Margin

Operating profit - Taxes & Interest = Net profit

x 100 = 

Net profit for the year

       Sales revenue

Net profit margin (%)

(Profit for the year margin)

(Profit for the year margin)

Check the financial statement again.

What was their net profit for the year margin?

1. 29%
2. 350%
3. 3.5%
4. 28%

Now let's practice some more examples in your textbooks...