9609 · 10.2.2
Profitability ratios flashcards
Revision flashcards for Cambridge 9609 Profitability ratios (syllabus 10.2.2). Flip, recall, then mark a real past-paper question.
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Gross profit margin formula?
Gross profit ÷ Revenue × 100%.
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Operating profit margin formula?
Operating profit ÷ Revenue × 100%.
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ROCE formula?
Operating profit ÷ Capital employed × 100%.
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Capital employed?
Equity + Non-current liabilities (or Total assets − Current liabilities).
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Falling GPM?
Rising COGS, price cuts, product mix shift, supplier cost increases.
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Falling OPM but stable GPM?
Overheads rising — admin, marketing, wages not in COGS.
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ROCE uses which profit?
Operating profit (before finance costs) — measures return on all long-term capital.
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Why compare over time?
Single-year ratio may be distorted; trends show direction of performance.
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What is the formula for Gross Profit Margin (GPM)?
(Gross Profit / Revenue) × 100. It measures the percentage of revenue that exceeds the cost of sales.
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How does Operating Profit Margin (OPM) differ from Gross Profit Margin (GPM)?
OPM includes all operating expenses (overheads) in its calculation, whereas GPM only considers the cost of sales. OPM therefore provides a more complete view of a firm's operational efficiency.
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What is the formula for Return on Capital Employed (ROCE)?
(Operating Profit / Capital Employed) × 100. Note: Capital Employed = Total Equity + Non-Current Liabilities.
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What does ROCE measure for a business?
It measures how efficiently a company is using its long-term capital to generate profit. It is a key indicator of the profitability of a company's total investments from both shareholders and lenders.
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What is 'trend analysis' in the context of profitability ratios?
It is the practice of comparing a company's ratio results over a period of several years to identify patterns, such as a consistent improvement or decline in profitability, and to help forecast future performance.