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Chapter 11
Financial performance and ratio
analysis
2.1 Profitability ratios
Gross profit margin = Gross profit × 100
Turnover
A high gross profit margin is desirable. It indicates that either sales prices are
high, or that production costs are being kept well under control.
Net profit margin = Net profit × 100
Turnover
A high net profit margin is desirable. It indicates that either sales prices are
high, or that all costs are being kept well under control.
Return on Capital Employed (ROCE) = Net profit × 100
Capital employed
This is a key measure of profitability. It is the net profit as a percentage of the
capital employed. The ROCE shows the net profit that is generated from each $
of assets employed.
Asset turnover = Turnover × 100
Capital employed
The asset turnover shows the turnover that is generated from each $ of assets
employed.
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