Calculate profitability ratios and return on capital employed
Apply Cambridge's specified formulae for gross-profit margin, mark-up, profit margin and return on capital employed.
Section 6.1 · Calculation and understanding of accounting ratios
Cambridge IGCSE Accounting 0452 / (9–1) 0985, 2027–2029 Version 1. These lessons follow the 2027–2029 syllabus only; the separate 2026 syllabus update is not yet mapped. Written practice is self-checked, not an official Cambridge grade. Full timed-paper practice and human subject-teacher review remain pending.
Before you begin
- No previous accounting study is assumed. Keep the business, transaction and accounting period in view, and distinguish a resource, a claim and a performance result.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Which profit figure is used in the syllabus ROCE formula?
What you will learn
- Calculate gross-profit margin, mark-up and profit margin
- Calculate return on capital employed using the stated capital-employed formula
- Present percentages with appropriate working and labels
Use the specified profitability formulae
Gross-profit margin (%) = gross profit ÷ revenue × 100. Mark-up (%) = gross profit ÷ cost of sales × 100. Profit margin (%) = profit for the year ÷ revenue × 100.
The denominators differ: margin uses revenue, while mark-up uses cost of sales. Use the formulae printed in the syllabus; Cambridge states these are the only formulae accepted in candidate responses.
Calculate ROCE with the given capital-employed base
Return on capital employed (ROCE) (%) = profit for the year before interest ÷ capital employed × 100. For this syllabus, capital employed = issued shares + reserves + non-current liabilities.
Use profit before interest as the numerator. Show the amount used for capital employed and keep the percentage separate from a ratio expressed as times or days.
Pause and explain
Gross profit is $18,000, cost of sales $60,000 and revenue $75,000. Calculate mark-up and gross-profit margin.
Worked example
Revenue is $100,000, cost of sales $60,000, gross profit $40,000, profit for the year $18,000 and profit before interest $20,000. Issued shares are $80,000, reserves $20,000 and non-current liabilities $50,000. Calculate the four profitability ratios.
Show the worked solution
- Gross-profit margin = 40,000 ÷ 100,000 × 100 = 40%; mark-up = 40,000 ÷ 60,000 × 100 = 66.7%.
- Profit margin = 18,000 ÷ 100,000 × 100 = 18%.
- Capital employed = 80,000 + 20,000 + 50,000 = $150,000; ROCE = 20,000 ÷ 150,000 × 100 = 13.3%.
Answer Gross-profit margin 40%; mark-up 66.7%; profit margin 18%; ROCE 13.3%.
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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 $160,000, gross profit $64,000, profit for the year $20,000, profit before interest $24,000, issued shares $90,000, reserves $30,000 and non-current liabilities $40,000. Calculate gross-profit margin, mark-up, profit margin and ROCE.
Give me a hint
Apply each ratio with its own formula and denominator.
Compare my reasoning
- Gross-profit margin = 64,000 ÷ 160,000 × 100 = 40%; mark-up = 64,000 ÷ (160,000 − 64,000) × 100 = 66.7%.
- Profit margin = 20,000 ÷ 160,000 × 100 = 12.5%.
- Capital employed = 90,000 + 30,000 + 40,000 = 160,000; ROCE = 24,000 ÷ 160,000 × 100 = 15%.
Gross-profit margin 40%; mark-up 66.7%; profit margin 12.5%; ROCE 15%.
Look for these in your work
- Each formula base correct
- Mark-up cost derived
- ROCE numerator and base correct
A company reports revenue $240,000, cost of sales $150,000, other expenses $58,000 and other income $4,000. Calculate profit for the year and profit margin.
Give me a hint
Find gross profit first, then include other income and expenses.
Compare my reasoning
- Gross profit = 240,000 − 150,000 = $90,000.
- Profit = 90,000 + 4,000 − 58,000 = $36,000.
- Profit margin = 36,000 ÷ 240,000 × 100 = 15%.
Profit for the year $36,000; profit margin 15%.
Look for these in your work
- Gross profit correct
- Other income and expenses included
- Margin correct
An answer calculates ROCE as profit after interest $18,000 divided by share capital and reserves $100,000. The question gives profit before interest $22,000 and non-current liabilities $30,000. Correct the calculation.
Give me a hint
Use the stated profit-before-interest numerator and the full syllabus capital-employed base.
Compare my reasoning
- Capital employed = share capital and reserves 100,000 + non-current liabilities 30,000 = $130,000.
- ROCE = 22,000 ÷ 130,000 × 100.
- ROCE = 16.9% to one decimal place.
Correct ROCE is 16.9%; include non-current liabilities and use profit before interest.
Look for these in your work
- Denominator corrected
- Numerator corrected
- Percentage correct
Common mistakes
- Using revenue as the mark-up denominator
- Using cost of sales as the margin denominator
- Using profit after interest for the stated ROCE formula
- Omitting non-current liabilities from the syllabus capital-employed base
What can you explain now?
What is the denominator for gross-profit margin?
Compare with the explanation
Revenue
The ratio compares gross profit with revenue earned.
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Make it stick
Why do mark-up and gross-profit margin usually produce different percentages for the same figures?
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.