GPM
What is the formula used to calculate the Gross Profit Margin?
(Gross Profit / Sales Revenue) * 100
What is the formula for calculating the Profit Margin?
(Profit before Interest and tax/ Sales Revenue) *100
What is the formula for calculating the ROCE?
(Profit before Interest and Tax/Capital Employed)*100
What is the Ratio to calculate the current ratio?
Current Assets/ Current Liabilities
What is the ratio for calculating the Quick Ratio?
(Current assets-stock)/ Current liabilities
It means that for every $100 the company makes, they keep $70 in gross profit?
What does a PM of 50% mean?
It means that for every $100 the company makes, they keep $70 in profit before interest and tax
What does a ROCE of 20% mean?
It means that for every $100 the company has as capital invested, they keep $20 in profit before interest and tax
What is an ideal current ratio?
2
Why do we remove stock when calculating the quick ratio?
Because it is the least liquid asset. It takes the longest to turn into cash
Strategies to increase the GPM include:
•Increase prices for products in less competitive markets
•Reduce cost of sales by finding a cheaper source of raw materials
•Adopt more aggressive promotional strategies to increase sales
Reduce labor costs; make sure staff are productive; unproductive workers may need to be shed
Strategies to improve PM include:
1.Raise the price of the product with no significant increase in variable costs.
2.Cut overhead costs, such as rent, promotion costs or management costs, but maintain sales levels, for example
by:
1.moving to a cheaper head office location
2.reducing promotion costs
3. delayering the organization.
Strategies to improve the ROCE include:
•Try to reduce the amount of loan capital while still ensuring that net profits remain unchanged or do not fall
•A firm might declare and pay additional dividends to shareholders; reduces retained profit and raises the ROCE.
Increase net profit without increasing capital employed,
e.g. 1. raise prices of existing products
2. develop innovative products and set prices high
3. reduce variable costs per unit
4. reduce overheads, such as delayering or reducing promotion costs
5. increase capital invested in new technology which could lead to an increase in net profits higher than the increase in capital employed
Reduce capital employed, e.g.
• sell assets that contribute nothing or little to sales/profit – use the capital raised to reduce debts
Strategies to include the current ratio include:
•Sell off fixed assets for cash – could lease these back if still needed by the business
•Sell off inventories for cash
•Increase loans to inject cash into the business and increase working capital
Strategies to improve the quick ratio
•Cut overdrafts and use long-term loans with lower interest rates.
•Avoid late payment penalties from creditors by paying on time.
•Take advantage of cash payment discounts.
•Encourage cash purchases by offering discounts for immediate cash payments or early repayments if they have trade credit.
Calculate the GPM:
Sales Revenue 1,000,000
COGS: 300,000
70%
Calculate the Profit Margin:
Same example but:
Expenses are
Rent 100,000 Salaries 150,000 and utilities 150,000
30%
Calculate the ROCE
Capital Employed is 2,000,000
15%
Calculate the current ratio:
Cash:150,000, Debtors: 50,000 Stock: 60,000
Creditors: 150,000, Overdrafts: 180,000
0.78 :1
Same Example: Calculate the quick Ratio
0.6: 1
Give examples of sectors where the GPM increased during the Pandemic's lock down?
Hospitals, Pharmaceuticals, Sanitizers....
Why did the profit margin of companies decrease during the pandemic?
because businesses where paying rent and salaries with little to no sales revenue
Share Capital, Loan Capital, and Retained Profits
How can a business collect the debtors faster to improve their liquidity?
By imposing delay penalties or selling with cash only.
Why is having too much stock bad for your company's financial position?
Storage costs, might become obsolete, outdate, or perishable.