3.5.2—Improving profitability ratios

Profitability improves when more of each sales pound becomes profit or when the same capital produces more operating return. Actions should be linked to the ratio that is weak rather than chosen from a generic list.

Gross margin can rise through higher prices, a better product mix or lower direct costs; profit margin also depends on overheads. RoCE can improve by increasing operating profit without new capital or by releasing capital that earns too little.

Bulk buying may reduce unit cost but can increase storage and stock risk; cutting staff may reduce overhead but harm service and productivity. A branch with the lowest RoCE may be a closure candidate, but demand, strategic role and restructuring cost still matter.

Cost cutting is not automatically improvement, and a benchmark such as 20% is not a universal rule. Explain the mechanism, likely side effects and time horizon before recommending an action.