Gross Profit Margin = Gross Profit X 100
1. Since all costs that are deducted when computing the gross profit are directly
variable with sales, it is assumed that the gross profit margin should remain
2. Yet this view is less popular for a manufacturer because the COGS includes fixed
costs such as factory lighting and heating, factory rent and rates, and semi-variable
3. The change may occur due to: Price cuts, cost increases, changes in mix, under- or
overvaluation of stocks.
Net Profit Percentage = Net Profit before interest and tax X100
1. It is designed to focus attention on the net profit margin arising from business
2. Net profit, like gross profit, increases with sales, and this increase occurs as a
percentage of sales.
Rate of Return on Gross Assets = Net profit before interest and tax X 100
Avg Gross Assets (Total Assets less Current Liabilities)
Or = Total Asset Turnover x Net Profit Percentage
Sales X Profit Before Interest & Tax
Capital Employed Sales
1. Also known as the Rate of Capital Employed, Shareholder's Equity, Long-Term
2. It measures the extent at which the management makes the most effective use of
3. Since Total Asset Turnover multiplied by the Net Profit Percentage is equivalent to
the Return on Gross Assets, one must note that lower asset utilization must be
compensated by the profit margins, or vice versa, to effectively manage the Rate on
Gross Assets. This is why this ratio is described as the primary accounting ratio.
Therefore, it may be necessary to calculate the asset turnover ratio and the net profit
margin to find out why the ROCE is high or low.
4. As such there’s a tradeoff between the net profit percentage and the total asset
turnover, the reasons being, a high net profit percentage, means a higher price per
unit, which may not generate a high number of sales, hence, a lower asset turnover.
Rate of Return on Shareholder's Equity = Earning (Pre or Post) X 100
Avg. shareholder's Equity (Share Capital + Reserves)