Profitability ratios

In this lesson

1. 0:00 Gross profit margin explained
2. 0:27 Operating margin and indirect costs
3. 2:51 Return on capital employed
4. 3:33 Asset turnover ratio
5. 5:41 Relationships between ROCE and margins
6. 6:33 Return on equity versus ROCE
7. 7:37 Worked example calculating ROCE

About this lesson

This video teaches you what each ratio measures, why it matters to investors and stakeholders, and the common factors that cause these ratios to change over time. You'll also discover how these ratios connect to one another, giving you a complete framework for analysing a company's financial performance. This is essential knowledge for Financial Accounting, Management Accounting, and Strategic Business Reporting papers across ACCA and CIMA qualifications. In this lesson, you'll work through each profitability ratio step by step. You'll see how gross profit margin reveals how well a company controls direct costs, while operating margin expands that view to include indirect expenses like distribution and administration. Return on capital employed shows how efficiently the business generates profit from all long-term funds invested, and asset turnover measures how effectively assets convert into revenue. Return on equity focuses specifically on shareholder returns. For each ratio, you'll explore realistic reasons why it might increase or decrease—from changes in raw material prices and sales strategies to new asset investments and revaluations. The video includes a worked example calculating return on capital employed from financial statement data, showing you exactly how to apply these formulas in exam conditions. You'll also learn the important relationship between return on capital employed, operating margin, and asset turnover—understanding how these three ratios connect will deepen your analytical skills and help you answer case study and exam questions with greater confidence.

Duration: 9m