Profitability Ratios

Profitability ratios shown profitability in relation to sales and to investment. Management can use the profitability measure to monitor its performance and to help plan strategies. There are the various measure of profitability: gross profit margin, net profit margin, return on investment, return on equity, earnings per share, price/earnings ratio.

Gross Profit Margin

The gross profit margin indicates the percentage of each sales dollar remaining after the firm has paid for its goods. It is calculated as follows:

Gross profit margin = sales - cost of goods sold = gross profit
Sales Sales

For Jimco gross profit margin for 1993 is:

$13,000,000 = 2.55, or 25.5%
$51,000,000

industry average = 16.67%

Jimco's gross profit margin appears to be greater than the industry norm of 16.67 percent.


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Finance For Strategic Management
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