PROFITABILITY INDEX

1.   Gross profit margin

Gross profit margin calculates the percentage of gross profit to sales ratio/net sales.

where gross profit is calculated as

ABC & CO statement of profit and loss for the year ended 20x5

PARTICULARS	$	$	$
Revenue	XXX
Less: Sales returns	XX
Net sales	XXX	XXX	XXX
Less: cost of sales
Opening stock		XX
Add: purchases	xxx
Less: Purchase returns	(X)
Cost of goods available	XX
Less: closing stock	(XX)	XX
Cost of sales		XX	(XX)
Gross Profit			XX

 

 

EXAMPLE

Fish co is a supermarket that prepares its account to dec 20x10 for the year. Below are trial balance figures for Fish co for the year

TRIAL BALANCE	DEBIT	CREDIT
Revenue		100,000
Purchase	60,000
Sales returns	5000
Cash	20,000
Purchase returns		10,000
Plant and machinery	50,000
Depreciation		7,000
Debtors	15,000
rent	3,000
Utility bills	2,000
Medical bills	5,900
capital		20,000
Creditors		6,000
Bank overdraft		3,000
Bank loan		14,900
Total	160,900	160,900

 

Where inventory at the start of the period is $15000 and inventory at the end is $7,000. Accumulated depreciation is $22,000.

 

PARTICULARS	$	$	$
Revenue	100,000
Less: Sales returns	(5000)	95000	95000
Less: cost of sales
Opening stock		15000
Add: purchases	60,000
Less: closing stock	(7,000)
Purchase returns	(10,000)	43000	(58,000)
Gross Profit			37,000

 

Therefore, gross profit

=38%

2.               2. NET PROFIT MARGIN

net profit or profit before interest and tax (PBIT) is determined after the gross profit computation that is when operating expenses have been subtracted from the gross profit.

 

Therefore, net profit   

 

PARTICULARS	$	$	$
Revenue	XXX
Less: Sales returns	(XX)	XXX	XXX
Less: cost of sales
Opening stock		XX
Add: purchases	xxx
Less: closing stock	(XX)
Purchase returns	(X)	(XX)	(XX)
Gross Profit			XX
Less: expenses
Rent	X
Medical bills	X
Depreciation	X
Utility bills	X	(XX)	(XX)
Net Profit			XX

 

 

 

 

 

 

 

 

 

 

EXAMPLE: Continuation from gross profit

Fish co is a supermarket that prepares its account to dec 20x10 for the year. Below are trial balance figures for Fish co for the year

TRIAL BALANCE	DEBIT	CREDIT
Revenue		100,000
Purchase	60,000
Sales returns	5000
Cash	20,000
Purchase returns		10,000
Plant and machinery	50,000
Depreciation		7,000
Debtors	15,000
rent	3,000
Utility bills	2,000
Medical bills	5,900
capital		20,000
Creditors		6,000
Bank overdraft		3,000
Bank loan		14,900
Total	160,900	160,900

 

Where inventory at the start of the period is $15000 and inventory at the end is $7,000. Accumulated depreciation is $22,000.

SOLUTION

PARTICULARS	$	$	$
Revenue	100,000
Less: Sales returns	(5000)	95000	95000
Less: cost of sales
Opening stock		15000
Add: purchases	60,000
Less: closing stock	(7,000)
Purchase returns	(10,000)	43000	(58,000)
Gross Profit			37,000
Less: expenses
Rent	2,000
Utility bills	3,000
Medical bills	5,900
Depreciation	7,000	17,900	(17,900)
Net profit			19,100

 

Net profit =

=20%

3.      3. RETURN ON INVESTMENT /RETURN ON CAPITAL EMPLOYED

 

Capital employed is calculated by subtracting the value of current liabilities from total assets or the sum of the individual’s capital plus long-term liabilities.

Profit before interest and tax is also called net profit.

 

 

EXAMPLE

Continuation from the example above

TRIAL BALANCE	DEBIT	CREDIT
Revenue		100,000
Purchase	60,000
Sales returns	5000
Cash	20,000
Purchase returns		10,000
Plant and machinery	50,000
Depreciation		7,000
Debtors	15,000
rent	3,000
Utility bills	2,000
Medical bills	5,900
capital		20,000
Creditors		6,000
Bank overdraft		3,000
Bank loan		14,900
Total	160,900	160,900

 

Where inventory at the start of the period is $15000 and inventory at the end is $7,000. Accumulated depreciation is $22,000.

 

SOLUTION

Capital employed can be gotten from the statement of position

FISH CO STATEMENT OF POSITION
NON-CURRENT ASSET	$	$	Owned by
Plant and machinery	50,000		capital	20,000
depreciation	(29,000)	21,000	Net profit	19100	39,100
CURRENT ASSET			CURRENT LIABILITIES
Debtors	15,000		Creditors	6,000
Cash	20,000		Bank overdraft	3,000
inventory	7,000	42,000	Bank loan	14,900	23,900
		63,000			63,000

 

Therefore, capital employed = total asset – current liabilities

                                                = 85,000-23,900

                                                =61,100

Return on investment =

=31%

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