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Chapter 1

6.2 Profitability ratios

Operating profit margin = (Operating profit/Revenue) × 100%.

 This shows how much each unit generates towards profit.

Gross profit margin = (Gross profit/Revenue) × 100%.

 This shows what proportion of revenue is left once specific costs of sales have
been paid.

Return on Capital Employed (ROCE) and Return on Equity (ROE):

ROCE = (Operating profit/Capital employed) × 100%

This measures the underlying performance of the business before considering
financing.

Capital employed = total funds (debt and equity) invested in the business.

ROE = (Net profit/Equity value) × 100%

This measures the return which relates to the shareholders.

Note: ROE is post tax and ROCE is pre-tax, so the ratios are not directly
comparable.

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