Ratio Analysis

Profitability and liquidity ratios — how to calculate and interpret gross margin, net margin, ROCE and the current ratio.

Ratios turn the financial statements into measures that can be compared over time and between businesses.

Profitability ratios

Gross profit margin

= \dfrac{\text{gross profit}}{\text{revenue}} \times 100

Profit (net) margin

= \dfrac{\text{profit for the year}}{\text{revenue}} \times 100

Return on capital employed (ROCE)

= \dfrac{\text{operating profit}}{\text{capital employed}} \times 100

Worked example. Gross profit £19,000 on revenue £50,000: gross margin $= \dfrac{19{,}000}{50{,}000} \times 100 = 38\%$ .

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Profitability ratios

Gross profit margin

= \dfrac{\text{gross profit}}{\text{revenue}} \times 100

Profit (net) margin

= \dfrac{\text{profit for the year}}{\text{revenue}} \times 100

Return on capital employed (ROCE)

= \dfrac{\text{operating profit}}{\text{capital employed}} \times 100

Worked example. Gross profit £19,000 on revenue £50,000: gross margin

= \dfrac{19{,}000}{50{,}000} \times 100 = 38\%