GCSEBusinessOCRRevision NotesFinanceRevenue, Costs, Profit & LossProfitability Ratios

Profitability Ratios (OCR GCSE Business)

Revision Note

Lisa Eades

Expertise

Business Content Creator

An Introduction to Profit Margins

  • Profit margins measure how successfully a business converts revenue into profit

  • Profit margins are expressed as percentages

    • This allows comparison of business performance over time and also comparisons with other businesses

Gross Profit Margin

  • The gross profit margin is the proportion of revenue that is converted into gross profit

  • It is calculated using the formula

Gross space profit space margin space equals space fraction numerator Gross space profit over denominator Revenue end fraction space straight x space 100

Worked Example

Head to Toe Wellbeing’s revenue in 2022 was £124,653. Its gross profit was £105,731

Calculate Head to Toe Wellbeing Ltd’s gross profit margin in 2022. [2 marks]

 Step 1: Substitute the values into the formula

Gross space profit space equals space fraction numerator Gross space profit space over denominator Sales space revenue end fraction space cross times space 100 space space space

equals space fraction numerator £ 105 comma 731 over denominator space £ 124 comma 653 space end fraction equals space space 0.8482 space [1]

Step 2: Multiply the outcome by 100 to find the percentage

equals space 0.8482 space cross times space 100 equals space 84.82 percent sign      [1]

84.82% of Head to Toe Wellbeing’s revenue was converted into gross profit during 2022.

Net Profit Margin

  • The net profit margin is the proportion of revenue that is converted into net profit

  • It is calculated using the formula

Net space profit space margin space equals space fraction numerator Net space profit over denominator Revenue end fraction space straight x space 100

Worked Example

Head to Toe Wellbeing’s revenue in 2022 was £124,653. Its net profit was £65,864

Calculate Head to Toe Wellbeing Ltd’s net profit margin in 2022. [2 marks]

Step 1: Substitute the values into the formula

text Net Profit Margin =  end text fraction numerator Net space Profit over denominator Revenue end fraction cross times 100

equals space fraction numerator £ 65 comma 864 over denominator £ 124 comma 653 end fraction equals space 0.5284 [1]

Step 2: Multiply the outcome by 100 to find the percentage

equals space 0.5284 space cross times space 100 equals space 52.84 percent sign  [1]

In 2022, 52.84% of Head to Toe Wellbeing’s revenue was converted into net profit.

Examiner Tip

When you answer calculation questions, remember:

  • Take care that your figures are easily recognisable

    • In some cases, the number 4 and the number 9 could be confused by the examiner

  • Check the number of decimal places or significant figures required

    • If you only give  your answer to one decimal place rather than two, you will lose a mark, even if your answer is correct

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    Lisa Eades

    Author: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.