Grade 10/11/12: ratio analysis
Profitability: Can the business make a profit based of income, expenses,
assets and liabilities?
1. Gross Profit on Turnover ( Gross Profit Margin)
Gross Profit/ Turnover x 100
• The gross profit increased or decreased from x to y ( previous
financial year to the current financial year).
• This means for every R 1 sale it was x amount in year 2
compared to year 1, to cover expenses.
• Factors Included: reduction in selling price ( % Mark-up), higher
cash and trade discounts, increase in purchase price without increase in
selling price, errors in recording cost of sales (goods returned), inventory
losses ( old/damaged goods/ obsolete stock/ goods at reduced price).
2. Gross profit on Cost of Sales
Gross profit/ cost of sales x 100
In year 1 for every R1 of COS, x amount of cents pf gross profit was
made. This increased or decreased to y in year 2. This indicates that the
markup % that the undertaking achieved during the years must be under
review. If the actual mark-up is y then the business is controlling COS in
a different manner but if mark-up isn't achieved the owner must find out
why.
Always compare to the actual markup.
, Factors: cost price of goods is expensive and selling price is not
adjusted accordingly, reduction of the selling price to get rid of stock
quickly ( sales - year-end sales), a change in the pricing policy, cash
and trade discounts on selling price, or damaged or inferior quality of
goods sold ( no COS reversal).
3. Total Operating Expenses to Turnover
Total Expenses / Turnover x 100
The total operating expenses to turnover increased or decreased from x
in year 1 to y in year 2. The decrease/ increase indicates a better/ worse
control over the operating expenses in the current year. For every R1, x
cents was spent on operating expenses in year 1 and y in year 2.
Determine the costs incurred per R1 of sales , how efficient the control of
operating expenses has been.
Decrease can be due to decreasing the business expenses like cutting
back on wages , telephone, fuel, advertising, etc. Keep operating
expenses as low as possible,
Compare this to the gross profit on turnover.
Is your Gross profit High enough to cover operating expenses or is the
business relying on other income to cover operating expenses?
Tip: see which expenses has increased from last year to this year and
how we can cut on costs,
4. Net profit on Turnover
Profitability: Can the business make a profit based of income, expenses,
assets and liabilities?
1. Gross Profit on Turnover ( Gross Profit Margin)
Gross Profit/ Turnover x 100
• The gross profit increased or decreased from x to y ( previous
financial year to the current financial year).
• This means for every R 1 sale it was x amount in year 2
compared to year 1, to cover expenses.
• Factors Included: reduction in selling price ( % Mark-up), higher
cash and trade discounts, increase in purchase price without increase in
selling price, errors in recording cost of sales (goods returned), inventory
losses ( old/damaged goods/ obsolete stock/ goods at reduced price).
2. Gross profit on Cost of Sales
Gross profit/ cost of sales x 100
In year 1 for every R1 of COS, x amount of cents pf gross profit was
made. This increased or decreased to y in year 2. This indicates that the
markup % that the undertaking achieved during the years must be under
review. If the actual mark-up is y then the business is controlling COS in
a different manner but if mark-up isn't achieved the owner must find out
why.
Always compare to the actual markup.
, Factors: cost price of goods is expensive and selling price is not
adjusted accordingly, reduction of the selling price to get rid of stock
quickly ( sales - year-end sales), a change in the pricing policy, cash
and trade discounts on selling price, or damaged or inferior quality of
goods sold ( no COS reversal).
3. Total Operating Expenses to Turnover
Total Expenses / Turnover x 100
The total operating expenses to turnover increased or decreased from x
in year 1 to y in year 2. The decrease/ increase indicates a better/ worse
control over the operating expenses in the current year. For every R1, x
cents was spent on operating expenses in year 1 and y in year 2.
Determine the costs incurred per R1 of sales , how efficient the control of
operating expenses has been.
Decrease can be due to decreasing the business expenses like cutting
back on wages , telephone, fuel, advertising, etc. Keep operating
expenses as low as possible,
Compare this to the gross profit on turnover.
Is your Gross profit High enough to cover operating expenses or is the
business relying on other income to cover operating expenses?
Tip: see which expenses has increased from last year to this year and
how we can cut on costs,
4. Net profit on Turnover
