10.2.2—Profitability ratios

Gross profit margin relates gross profit to revenue; operating profit margin relates operating profit to revenue; return on capital employed compares operating profit with capital invested.

Ratios help compare performance over time or between firms, but differences may reflect price, product mix, accounting policy, asset age or risk—not just management quality.

A firm can raise gross margin through price or lower input cost while operating margin falls because marketing and administration rise.

A higher margin is not automatically better if it depends on unsustainable price, underinvestment or lower service quality.