# What are profitability ratios

Updated: Feb 22

There are three (3) profitability or performance ratios. Gross profit margin, profit margin and return on capital employed.

**Gross Profit Margin (GPM)**

GPM measures the amount of gross profit earned as a proportion of revenue. They can determine how much percentage of profit is earned from sales. By comparing gross profit margin year-on-year, a business can measure if cost of sale has increased or decreased. Therefore, **higher gross profit margin will indicate higher profit generated from revenue.**

**Profit Margin (PM)**

Profit margin on the other hand measures the profit before tax earned as a proportion of revenue. It helps determine the percentage of profit earned from sales after all expenses. By comparing profit margin year-on-year, a business can determine if expenses have increased or reduced compared to the revenue generated. Higher profit margin means, **higher profit generated from revenue after expenses. **

By comparing the difference between GPM and PM, you can **determine if there is a need to reduce expenses (fixed cost) to increase profit**. *Not sure how? Comment below*

__RELATED CONCEPTS__

Profit

Revenue

Expenses