Profitability ratios: GP and NP margin, ROCE, ROE
1 min read
Updated 29 Sep 2026
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AI summary
How much profit the business earns on sales and on the money invested.
2 sections
Formulas
| Ratio | Formula |
|---|---|
| Gross profit ratio | Gross profit ÷ Net sales × 100 |
| Net profit ratio | Net profit after tax ÷ Net sales × 100 |
| Operating expense ratio | Operating expenses ÷ Net sales × 100 |
| Return on capital employed (ROCE) | EBIT ÷ (Equity + Long-term debt) × 100 |
| Return on equity (ROE) | Net profit after tax ÷ Shareholders' funds × 100 |
Reading them
- A healthy GP ratio but weak NP ratio → overheads too high.
- ROCE below the interest rate on loans → borrowed money is earning less than it costs.
- Compare month-on-month and year-on-year; a sudden jump or drop usually means an entry problem, not a real change.
PreviousTurnover ratios: inventory, debtor and creditor Next in Financial Statements Break-even analysis
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