• Examine the relationship between items in the income statement and total revenue e.g.
  • COGS/Total revenue: If high, check if materials are too expensive or productivity is too low
• Compare ratios with a similar company or industry averages to determine your capacity
  • Low gross profit margin = inadequate sales, high materials or inventory cost
  • Low operating profit margin = operating expenses out of control
  • Low net profit margin = high cost of investment or financing activities
• Trend analysis over time
  • Compare over 3 years

• Ratio analysis over time
  • Compare over 3 years

To improve profitability:

• Review pricing to be sure you’ve built in adequate margin for profit
• Implement marketing and sales activities to attract customers
• Increase efficiency of production
• Review inventory to detect inefficiencies
• Control operating expenses