Calculate profitability ratios using Cambridge formulas
Calculate gross profit margin, mark-up, profit margin, return on capital employed and expense ratios with the official denominators.
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These original lessons cover objectives 1.6.1–1.6.2: stakeholder information needs, communication, the listed profitability, liquidity and efficiency ratios, interpretation, improvement measures and limitations. Ratio formulae follow the official syllabus appendix; use its formulae in candidate responses. Practice is self-checked, not an official Cambridge grade; timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use the Topic 1.5 statements and distinguish revenue, gross profit, operating profit, profit for the year, assets, liabilities and equity before selecting a ratio.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Revenue is $100,000 and gross profit is $35,000. What is gross profit margin?
What you will learn
- Calculate the listed profitability ratios from financial statements
- Distinguish profit margin from gross profit margin and mark-up
- Interpret changes with relevant evidence
Use the named numerator and denominator
Gross profit margin = gross profit ÷ revenue × 100. Mark-up = gross profit ÷ cost of sales × 100. They use the same gross profit but different denominators. Profit margin = profit for the year ÷ revenue × 100; the syllabus also allows profit for the year after interest in this formula.
Return on capital employed = profit from operations ÷ capital employed × 100. For this syllabus, capital employed = issued shares + reserves + non-current liabilities. Expenses to revenue ratio = expenses ÷ revenue × 100; operating expenses to revenue ratio = operating expenses ÷ revenue × 100. Use the precise expense category required by the question.
A percentage is a measure to interpret, not a verdict
Compare like with like: same formula, accounting period, business activity and relevant accounting policies. A higher gross profit margin may result from selling prices, purchase costs or product mix; it does not by itself identify the cause. A stronger return on capital employed may reflect higher operating profit, a smaller capital base or both.
Explain a movement using the figures available, then identify missing evidence. State whether profit is before or after interest, and do not substitute profit for the year for profit from operations when calculating return on capital employed.
Pause and explain
Profit from operations is $24,000 and capital employed is $160,000. Calculate ROCE.
Worked example
A company has revenue $250,000, cost of sales $150,000, operating expenses $45,000, finance costs $5,000 and tax $10,000. Issued shares are $200,000, reserves $60,000 and non-current liabilities $40,000. Calculate gross profit margin, mark-up, profit margin, return on capital employed and operating expenses to revenue.
Show the worked solution
- Gross profit = 250,000 − 150,000 = $100,000; profit from operations = 100,000 − 45,000 = $55,000.
- Profit for year = 55,000 − 5,000 − 10,000 = $40,000; capital employed = 200,000 + 60,000 + 40,000 = $300,000.
- Gross profit margin = 100,000/250,000 × 100 = 40%; mark-up = 100,000/150,000 × 100 = 66.7%; profit margin = 40,000/250,000 × 100 = 16%.
- ROCE = 55,000/300,000 × 100 = 18.3%; operating expenses to revenue = 45,000/250,000 × 100 = 18%.
Answer Gross profit margin 40%; mark-up 66.7%; profit margin 16%; ROCE 18.3%; operating expenses to revenue 18%, to one decimal place where appropriate.
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Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Revenue is $180,000, gross profit $63,000 and cost of sales $117,000. Calculate gross profit margin and mark-up, then explain why they differ.
Give me a hint
Divide by revenue for margin and by cost of sales for mark-up.
Compare my reasoning
- Gross profit margin = 63,000 ÷ 180,000 × 100 = 35%.
- Mark-up = 63,000 ÷ 117,000 × 100 ≈ 53.8%.
- The same gross profit is compared with different bases, so the percentages differ.
Gross profit margin is 35%; mark-up is approximately 53.8%. Mark-up is larger here because cost of sales is smaller than revenue.
Look for these in your work
- Margin formula correct
- Mark-up formula correct
- Denominator difference explained
Profit for the year is $22,500 on revenue of $150,000. Profit from operations is $30,000; capital employed is $200,000. Calculate profit margin and ROCE, and distinguish their profit bases.
Give me a hint
Profit margin uses profit for the year; ROCE uses profit from operations.
Compare my reasoning
- Profit margin = 22,500 ÷ 150,000 × 100 = 15%.
- ROCE = 30,000 ÷ 200,000 × 100 = 15%.
- The equal percentages arise from different profit numerators and different denominators; they do not measure the same thing.
Profit margin is 15%; ROCE is 15%. Profit margin uses profit for the year and revenue; ROCE uses profit from operations and capital employed.
Look for these in your work
- Profit margin correct
- ROCE correct
- Profit bases distinguished
A retailer’s gross profit margin rises from 28% to 31%, while total revenue falls. Give two possible explanations and one piece of evidence needed before recommending a price increase.
Give me a hint
A ratio reports a relationship; it does not isolate the cause or prove the best response.
Compare my reasoning
- The margin may rise because selling prices increased relative to purchase costs.
- It may also reflect a shift toward products with higher margins, supplier discounts or lower purchase costs.
- Check product-level volumes, prices, costs and customer response before raising prices; higher margins may accompany falling sales.
Possible causes include changed selling prices, purchase costs, supplier terms or product mix. Review unit volumes, product-level margins and customer response before recommending a price increase, especially as revenue is falling.
Look for these in your work
- Two plausible drivers named
- Cause not asserted as fact
- Relevant evidence and trade-off identified
Common mistakes
- Using revenue instead of cost of sales as the mark-up denominator
- Using profit for the year instead of profit from operations for ROCE
- Confusing the expense-to-revenue ratio with operating-expenses-to-revenue ratio
What can you explain now?
What is the denominator in the syllabus mark-up formula?
Compare with the explanation
Cost of sales
Mark-up = gross profit divided by cost of sales, multiplied by 100.
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Make it stick
Write the official formulas for gross profit margin, mark-up, profit margin, ROCE and operating expenses to revenue ratio.
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