Calculate profitability ratios
Calculate gross profit margin, profit margin and ROCE and explain what each compares.
Cambridge IGCSE Business 0264, 2027–2029 syllabus, Topic 5. Use the supplied data and show calculation steps. Candidates are not assessed on constructing cash-flow forecasts or financial statements. Written practice is self-checked and does not certify exam readiness
Before you begin
- No previous finance study is assumed. Identify the time period, whether a figure is a stock or a flow, and the units before calculating or recommending.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
How is profit margin calculated?
What you will learn
- Calculate three profitability ratios
- Interpret a ratio with context
- Use consistent statement figures
Margins relate profit to revenue
Gross profit margin = gross profit ÷ revenue × 100%. It shows gross profit as a percentage of revenue before expenses. Profit margin = profit ÷ revenue × 100%, showing final profit as a percentage of revenue.
For example, a 25% profit margin means the stated profit is 25 cents for each dollar of revenue in the period, using the same accounting basis. It does not mean 25% of every sale is cash available to distribute.
ROCE relates profit to capital employed
Return on capital employed (ROCE) = profit ÷ capital employed × 100%, using the syllabus formula. It compares profit with the long-term capital invested in the business.
Ratios help compare performance over time or between businesses, but different products, accounting periods, asset ages and business models affect results. Use a consistent formula and explain what additional evidence is relevant; no single ratio proves success.
Pause and explain
What does ROCE compare?
Worked example
A company has revenue $200,000, gross profit $70,000, profit $24,000 and capital employed $160,000. Calculate its gross profit margin, profit margin and ROCE.
Show the worked solution
- Gross profit margin = 70,000 ÷ 200,000 × 100 = 35%.
- Profit margin = 24,000 ÷ 200,000 × 100 = 12%.
- ROCE = 24,000 ÷ 160,000 × 100 = 15%.
Answer Gross profit margin is 35%, profit margin is 12% and ROCE is 15%. Each ratio uses the relevant profit figure over its stated base.
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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.
A business reports revenue $150,000, gross profit $54,000 and profit $18,000. Calculate gross profit margin and profit margin.
Give me a hint
Divide each requested profit figure by revenue and multiply by 100.
Compare my reasoning
- 54,000 ÷ 150,000 × 100 = 36%.
- 18,000 ÷ 150,000 × 100 = 12%.
- Label which ratio uses gross profit and which uses profit.
Gross profit margin is 36%; profit margin is 12%. The two ratios differ because expenses are deducted after gross profit.
Look for these in your work
- Gross margin correct
- Profit margin correct
- Measures labelled
Profit is $32,000 and capital employed is $200,000. Calculate ROCE and interpret it in one sentence.
Give me a hint
Use profit divided by capital employed, then multiply by 100%.
Compare my reasoning
- 32,000 ÷ 200,000 = 0.16.
- 0.16 × 100 = 16%.
- State that profit is 16% of capital employed for the period.
ROCE is 16%. For the stated period, profit is 16% of capital employed; comparison with another period or business would help assess whether this is strong.
Look for these in your work
- Calculation correct
- Meaning explained
- Comparison context noted
A company's profit margin rises from 8% to 10%, while revenue falls. Explain what can be concluded and name one limitation.
Give me a hint
The share of revenue represented by profit rose; total profit may still change.
Compare my reasoning
- The ratio increased by 2 percentage points.
- A lower revenue base means total profit is not established by the ratio alone.
- Check absolute profit, costs and whether periods use consistent accounting.
Profit is a larger percentage of revenue, rising by 2 percentage points. This does not establish that total profit increased because revenue fell; compare absolute profit and cost changes using consistent periods.
Look for these in your work
- Percentage-point change correct
- Ratio and amount distinguished
- Limitation stated
Common mistakes
- Using revenue as the numerator
- Mixing gross profit with profit margin
- Interpreting a ratio without a comparison or context
What can you explain now?
How is profit margin calculated?
Compare with the explanation
Profit ÷ revenue × 100%
Use profit, not gross profit, in the syllabus formula.
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Make it stick
What are the denominators for gross profit margin, profit margin and ROCE?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.