Question 3.A.7: What do you deduce from a comparison of the declines in the ...
What do you deduce from a comparison of the declines in the operating profit and gross profit margin ratios?
We can see that the decline in the operating profit margin was 9 percentage points (that is, 10.8 per cent to 1.8 per cent), whereas that of the gross profit margin was only 6.8 percentage points (that is, from 22.1 per cent to 15.3 per cent). This can only mean that operating expenses were greater, compared with sales revenue in 2016, than they had been in 2015. The decline in both ROSF and ROCE was therefore caused partly by the business incurring higher inventories purchasing costs relative to sales revenue and partly through higher operating expenses compared with sales revenue. We need to compare each of these ratios with their planned level, however, before we can usefully assess the business’s success.