Topic Summaries

Profit margins measure how much profit a business makes as a percentage of its revenue. These help assess financial performance and whether an investment is worthwhile.

• Profit margins: higher margins suggest efficient operations and pricing.
  • Gross Profit Margin (%) = (Gross Profit ÷ Revenue) × 100
  • Net Profit Margin (%) = (Net Profit ÷ Revenue) × 100
• Average rate of return (ARR): helps a business assess the profitability of an investment over time.It compares the average annual profit from an investment to the initial cost.
  • ARR = (Average Annual Profit ÷ Investment Cost) × 100
• Example:
  • Investment = £10,000
  • Profit per year = £2,000 over 5 years
  • ARR = (£2,000 ÷ £10,000) × 100 = 20%