Show the computation of the three ratios.
Gross profit margin (%) = Gross profit / Sales = 325,000/525,000 = 61.9%
Operating profit margin (%) = Operating profit / Sales = 91,750/525,000 = 17.5%
Net profit margin (%) = Net income / Sales = 77,000/525,000 = 14.7%
Comment on the purpose and information conveyed by each ratio.
Gross profit margin shows the amount of money left from sales made after making deductions of cost of goods sold. It shows investors how a company is able to use its materials and labor efficiently to produce its products profitably (Jami & Bahar, 2016).
Operating profit margin measures the amount of revenue remaining after payment of the variable costs incurred by a business but before paying interest. It shows a company is able to pay non-operating costs, thus vital to creditors and investors.
Net profit margin demonstrates the amount of profit made from every dollar of sales made. It shows investors the amount that can be translated into the payment of dividends or for reinvestment.
What did you learn about ABC Company by reviewing the three ratios?
From the three ratios it is evident that ABC Company efficiently uses its materials with a gross profit margin of 61.9%.Furthermore, the company is able to meet its non-operating costs and still remain with some money for reinvestments with a net profit margin of 14.7%.
What is your conclusion about the profitability of the company?
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