334 Accounting: Business Reporting for Decision Making
An entity must meet all other expenses from its gross profit. The comparison of sales revenue and
profit is referred to as the profit margin. This ratio reveals what percentage of sales revenue dollars
results in profit (loss). As with the ROA, it is not uncommon to see the profit margin computed with
EBIT rather than profit (loss) as the numerator. Any change in the profit margin over time must be
attributable to changes in the gross profit margin and/or changes in the expenses as a percentage of sales
(expense ratios). The ratio is calculated as:
Profit (loss)
×100 = x%
Sales revenueAs discussed in chapter 7, a cash-based measure of profitability is the cash flow (from operating
activities) to sales ratio. This ratio measures the relative amount of cash flow generated by each sales
revenue dollar. It is useful to compare this ratio with the equivalent accrual-based ratio, namely, the
profit margin. The ratio is calculated as:
Cash flow from operating activities
×100 = x%
Sales revenueAnalysis of profitability: JB Hi-Fi Ltd
In this section we will calculate the profitability ratios for JB Hi-Fi Ltd for the 2015 and 2014 reporting
periods, interpret the information that they convey and comment on their adequacy. The profitability
ratios for JB Hi-Fi Ltd for 2014 and 2015 are presented in figure 8.8.
2015 2014Return on equity (ROE)$136 511
($343 479 $294 633 )/2100 42.79%
++
××==
$128 447
($294 633 $243 828 )/2100 47.71%
++
××==Return on assets (ROA)$136 511
($ 895 013 $859 841 )/2100 15.56%
++
××==
$128 447
($859 841 $843 304 )/2100 15.08%
++
××==Gross profit margin$798 253
$3 652136100 21.86%
××==
$755 981
$3 483775100 21.70%
××==Profit margin$136 511
$3 652136100 3.74%
××==
$128 447
$3 483775100 3.69%
××==Cash flow to sales$179 896
$3 652136100 4.93%
××==$41 326
$3 483775100 1.19%
××==