
This Revision Bite will help you to use simple calculations to assess how a business is performing including profitability and Return on Capital Employed (ROCE).
The aim of businesses in the private sector is to make a profit.
Profit is important in three ways:

money, accounting records and a calculator
The purposes of a firm's trading account and profit and loss account are to calculate and show the gross and net profits. To measure how profitable a business is, percentages are used. This makes it easier to compare one set of results with those of a previous year, or those of a competitor.
You may be expected to answer questions in the exam about information given in a trading account and profit and loss account, like Go Faster Sports below. You may have to provide information about the gross profit margin [Gross profit margin: Total profit made in a year as a percentage of sales. ], the net profit margin [Net profit margin: Total profit minus costs made in a year - as a percentage of sales. ] or the Return on Capital Employed [Return on capital employed: Percentage earnings on capital invested in the business by the owners/shareholders. ] (ROCE).
This is a very popular exam topic. Make sure you know the calculations needed to assess business profitablity, and how this information can be interpreted. Make sure you look at the Solvency and Trading Efficiency Revision bites as well as this one.
A company's published accounts provide investors with indicators about the business' profitability. This will influence the future decisions of managers and investors.