Profitability Ratios

This lesson covers AQA A-Level Business topic 3.5.2 — analysing financial performance using profitability ratios. You will learn how to calculate and interpret gross profit margin, operating profit margin, and profit for the year margin (net profit margin). These ratios are essential tools for assessing how effectively a business converts revenue into profit.

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Why Use Ratios?

Raw profit figures alone can be misleading. A business making £1 million profit sounds impressive — but what if its revenue is £100 million? That is only a 1% profit margin. Ratios express profit as a percentage of revenue, enabling:

• Comparison over time: Is profitability improving or declining?
• Comparison between businesses: Which business is more efficient, regardless of size?
• Identification of problems: Where in the cost structure is profit being eroded?

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The Three Key Profitability Ratios

1. Gross Profit Margin

Formula: Gross Profit Margin (%) = (Gross Profit / Revenue) x 100

Where: Gross Profit = Revenue - Cost of Sales