Page 287 - Cambridge IGCSE Business Studies

23: Analysis of accounts

To help with your understanding of these ratios we are going to use an extract
from the accounting statements of Tang Toys Ltd. (TT) which we used in
TOP TIP previous chapters.
You must learn the formula
for all five accounting ratios
in this chapter and remember 2012 2013
to include the % sign where
appropriate. $000 $000
Revenue 420 500
Gross profit 189 240

Profit before interest and tax 63 70
Capital employed 120 120

Table 23.2 Extract from the financial statements of TT

KEY TERM Gross profit margin
Th e gross profi t margin ratio shows gross profit as a percentage of revenue. Th is

Gross profit margin %: ratio
ratio tells us how much gross profit is earned per $1 of revenue.

between gross profit and revenue.
Gross profit margin % = gross profit ×100
revenue

EXAMPLE
285
Using the data from Table 23.2, the 2012 gross profit margin for TT is:

189
Gross profit margin % (2012) = × 100
420
= 45.5%
This result tells us that every $1 of revenue earned $0.45 gross profit.

Since gross profit is the difference between revenue and cost of sales, you can see
that the gross profit margin is influenced by both revenue and cost of sales. Th is

Gross profit: see Chapter 21, means that if a business wants to improve its gross profit margin it can do this by:

page 268.
■ Increasing revenue without a similar increase in cost of sales – this may be
achieved through an increase in price.
KEY TERM ■ Reducing cost of sales without a similar decrease in revenue – this can be
achieved by buying cheaper supplies.
Profit margin %: ratio between
profit before tax and revenue.
Profit margin
Th e profi t margin shows profit as a percentage of revenue. This ratio tells us how

much profit is earned per $1 of revenue.
Profit margin % = profit ×100
Profit: see Chapter 21, revenue
page 268.