3.5.1—Profitability ratios

Profitability ratios show how much revenue becomes profit or how effectively invested capital generates profit. Gross profit margin = gross profit ÷ sales revenue × 100; profit margin uses profit before interest and tax; RoCE = profit before interest and tax ÷ capital employed × 100.

Gross margin focuses on cost of sales, profit margin includes operating costs, and RoCE links profit to long-term finance. Compare a ratio with the same business over time or with similar firms, not with an unrelated sector’s normal structure.

If gross profit is £105,731 on revenue of £124,653, gross margin is about 84.82%. A RoCE calculation also needs capital employed; keep units consistent and show what the percentage means for the business decision.

A high ratio is not automatically healthy: price, quality, risk, leverage and one-off events can change it. Ratios support judgement; they do not replace the accounts or context.