Why is "Using the wrong base for margin vs mark-up" a common mistake in Profitability Ratios?

Why it happens: Both relate gross profit to a base. How to avoid it: Margin is on REVENUE; mark-up is on COST OF SALES. Choose the right denominator. Source: 9706 Examiner Reports

Why is "Using profit for the year (after interest) for ROCE" a common mistake in Profitability Ratios?

Why it happens: Using the final profit figure. How to avoid it: ROCE uses PROFIT FROM OPERATIONS (before interest), to match the capital employed (which includes debt). Source: 9706 Examiner Reports

Why is "Calculating capital employed incorrectly" a common mistake in Profitability Ratios?

Why it happens: Omitting non-current liabilities. How to avoid it: Capital employed = issued shares + reserves + NON-CURRENT LIABILITIES (per the appendix). Source: 9706 Examiner Reports

Why is "Using a non-appendix formula" a common mistake in Profitability Ratios?

Why it happens: Memorising a different version. How to avoid it: Use only the formulae in the syllabus appendix — these are the only ones accepted. Source: 9706 syllabus note

Why is "Calculating ratios but not interpreting them" a common mistake in Profitability Ratios?

Why it happens: Stopping at the number. How to avoid it: For 'evaluate/comment', explain what the ratio means, compare it, and suggest causes/actions. Source: 9706 Examiner Reports

Why is "Confusing gross profit margin with profit margin" a common mistake in Profitability Ratios?

Why it happens: Both are 'margins'. How to avoid it: Gross profit margin uses GROSS profit; profit margin uses the PROFIT FOR THE YEAR (after expenses). Source: 9706 Examiner Reports

Cambridge International A Levels Accounting (9706)

Profitability Ratios

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Detailed Study Notes

Detailed notes on Accounting Information and Ratios for Cambridge International A Levels Accounting, covering key concepts, explanations, examples, and exam-focused revision points.

Profitability Ratios — Cambridge AS & A Level Accounting 9706 Study Notes (2026-2028)

How well a business turns sales and capital into profit. Master the exact 9706 formulae for gross profit margin, mark-up, profit margin, return on capital employed and the expenses ratios — and learn to interpret what each one tells different users. (You must use the formulae in the syllabus appendix.)

At a glance

Gross profit margin (%) = (Gross profit ÷ Revenue) × 100 — profit before expenses, as a % of sales.
Mark-up (%) = (Gross profit ÷ Cost of sales) × 100 — gross profit as a % of cost.
Profit margin (%) = (Profit for the year ÷ Revenue) × 100 — final profit as a % of sales.
ROCE (%) = (Profit from operations ÷ Capital employed) × 100 — return on the long-term capital.
Capital employed = issued shares + reserves + non-current liabilities.
Expenses to revenue (%) = (Expenses ÷ Revenue) × 100 — how much of sales is absorbed by expenses.
Use the formulae in the syllabus appendix — these are the only ones accepted.

What you’ll learn

Mapped to the Cambridge International A Level 9706 syllabus (2026-2028).

1.6.2 — Calculate profitability ratios: gross profit margin, mark-up, profit margin, return on capital employed, expenses to revenue ratio (operating expenses to revenue ratio).
1.6.2 — Evaluate the profitability of an organisation by interpreting the ratios.
Note: candidates must use the formulae given in the appendix to section 3.

Gross profit margin and mark-up

Both relate gross profit to a base — margin to sales, mark-up to cost.

Gross profit margin measures gross profit (revenue − cost of sales) as a percentage of revenue: $\text{Gross profit margin (\%)} = \frac{\text{Gross profit}}{\text{Revenue}} \times 100$

Mark-up measures gross profit as a percentage of cost of sales: $\text{Mark-up (\%)} = \frac{\text{Gross profit}}{\text{Cost of sales}} \times 100$

Interpretation:

A higher gross profit margin means a bigger gross profit on each $ of sales — from higher selling prices, lower buying costs, or a better sales mix.
A falling margin signals price cuts, rising purchase costs, theft of inventory, or under-recorded sales.

Example. Revenue $200,000; cost of sales $120,000 → gross profit $80,000.

Gross profit margin = 80,000 ÷ 200,000 × 100 = 40%;
Mark-up = 80,000 ÷ 120,000 × 100 = 66.7%.

Gross profit margin = (gross profit ÷ revenue) × 100.
Mark-up = (gross profit ÷ cost of sales) × 100.
Higher margin = more gross profit per $ of sales.
A falling margin signals price/cost/mix or control problems.

See the full worked example for profitability ratios →

Profit margin

Final profit as a percentage of sales, after all expenses.

Profit margin measures the profit for the year as a percentage of revenue — it reflects both the gross margin and how well expenses are controlled:

$\text{Profit margin (\%)} = \frac{\text{Profit for the year}}{\text{Revenue}} \times 100$

(It can also be expressed using profit for the year after interest — see the syllabus appendix.)

Interpretation:

A higher profit margin means more final profit per $ of sales.
If the gross margin is steady but the profit margin falls, the cause is rising expenses.
Comparing the two margins shows whether a profit problem is in buying/selling (gross) or in running costs (expenses).

Example. Revenue $200,000; profit for the year $30,000 → profit margin = 30,000 ÷ 200,000 × 100 = 15%.

Profit margin = (profit for the year ÷ revenue) × 100.
It reflects both the gross margin and expense control.
Steady gross margin + falling profit margin = rising expenses.
Comparing the two margins locates a profit problem.

See the full worked example for profitability ratios →

Return on capital employed (ROCE)

The return earned on the long-term capital invested in the business.

Return on capital employed (ROCE) measures how efficiently the business uses its long-term capital to generate operating profit — a key measure for owners and investors:

$\text{ROCE (\%)} = \frac{\text{Profit from operations}}{\text{Capital employed}} \times 100$

$\text{Capital employed} = \text{Issued shares} + \text{Reserves} + \text{Non-current liabilities}$

Interpretation:

A higher ROCE means the business earns a better return on the capital invested in it.
It is compared with previous years, other businesses, and the cost of borrowing (if ROCE is below the interest rate, borrowing destroys value).
ROCE uses profit from operations (before interest and tax), because capital employed includes debt that the interest relates to — so the numerator and denominator are consistent.

Example. Profit from operations $50,000; capital employed $250,000 → ROCE = 50,000 ÷ 250,000 × 100 = 20%.

ROCE = (profit from operations ÷ capital employed) × 100.
Capital employed = issued shares + reserves + non-current liabilities.
Use profit from operations (before interest) for consistency.
Compare with prior years, other firms and the cost of borrowing.

See the full worked example for profitability ratios →

The expenses ratios

How much of each $ of sales is absorbed by expenses.

The expenses to revenue ratio shows what proportion of sales is taken up by expenses:

$\text{Expenses to revenue (\%)} = \frac{\text{Expenses}}{\text{Revenue}} \times 100$

The operating expenses to revenue ratio does the same for operating (running) expenses:

$\text{Operating expenses to revenue (\%)} = \frac{\text{Operating expenses}}{\text{Revenue}} \times 100$

Interpretation:

A lower expenses ratio is better — fewer expenses per $ of sales, helping the profit margin.
A rising expenses ratio explains a profit margin falling while the gross margin holds.
It helps managers target cost control by showing where expenses are growing relative to sales.

These ratios complement the margins: together they explain why the profit margin is what it is.

Expenses to revenue = (expenses ÷ revenue) × 100.
Operating expenses to revenue = (operating expenses ÷ revenue) × 100.
Lower is better — fewer expenses per $ of sales.
A rising ratio explains a falling profit margin with a steady gross margin.

See the full worked example for profitability ratios →

Quick recap

Gross profit margin = (gross profit ÷ revenue) × 100; mark-up = (gross profit ÷ cost of sales) × 100.
Profit margin = (profit for the year ÷ revenue) × 100.
ROCE = (profit from operations ÷ capital employed) × 100.
Capital employed = issued shares + reserves + non-current liabilities.
Expenses to revenue = (expenses ÷ revenue) × 100.
Use the syllabus appendix formulae; relate ROCE to the cost of finance.

Memorise this

Verbatim phrases and definitions Cambridge mark schemes credit.

Gross profit margin = (gross profit ÷ revenue) × 100.
Mark-up = (gross profit ÷ cost of sales) × 100.
Profit margin = (profit for the year ÷ revenue) × 100.
ROCE = (profit from operations ÷ capital employed) × 100; capital employed = shares + reserves + non-current liabilities.

How it’s examined

A core Paper 2/Paper 3 task: Calculate the profitability ratios and Evaluate/comment on the business's profitability, often comparing two years (2-8 marks). Examiner reports stress using the exact appendix formulae, using profit from operations for ROCE, and the correct capital employed.

Sources: Cambridge International AS & A Level Accounting 9706 syllabus (2026-2028) — Appendix: summary of commonly used ratios; 9706 Paper 2 & Paper 3 past papers & mark schemes, 2022-2024; 9706 Examiner Reports, 2022-2024. Last reviewed 2026-06-18.

Take this whole topic with you

Step-by-step worked examples — Profitability Ratios

Step-by-step solutions to past-paper-style questions on profitability ratios, written exactly the way a tutor would explain them at the board.

Question type:

1Gross profit margin and mark-up (4 marks)
Getting startedDirect calculation• 9706 Paper 2 style• profitability, AO2
Question
Revenue $250,000; cost of sales$ 150,000. Calculate (a) the gross profit margin and (b) the mark-up. (4 marks)
Step-by-step solution
1. Step 1
  Gross profit = 250,000 − 150,000 = 100,000.
2. Step 2
  (a) Gross profit margin = 100,000 ÷ 250,000 × 100 = 40%.
3. Step 3
  (b) Mark-up = 100,000 ÷ 150,000 × 100 = 66.67%.
Answer
(a) Gross profit margin 40%; (b) mark-up 66.67%.
Examiner tip
Margin is on revenue; mark-up is on cost of sales.
2Profit margin (3 marks)
Getting startedDirect calculation• profitability, AO2
Question
Revenue $400,000; profit for the year$ 48,000. Calculate the profit margin. (3 marks)
Step-by-step solution
1. Step 1
  Profit margin = (profit for the year ÷ revenue) × 100.
2. Step 2
  = 48,000 ÷ 400,000 × 100.
3. Step 3
  = 12%.
Answer
Profit margin = 12%.
Examiner tip
Profit margin uses the profit for the year, not gross profit.
3Return on capital employed (5 marks)
Building confidenceMulti-step problem• ROCE, AO2
Question
Profit from operations $72,000. Issued shares$ 200,000; reserves $100,000; non-current liabilities$ 60,000. Calculate the ROCE. (5 marks)
Step-by-step solution
1. Step 1
  Capital employed = issued shares + reserves + non-current liabilities = 200,000 + 100,000 + 60,000 = 360,000.
2. Step 2
  ROCE = profit from operations ÷ capital employed × 100.
3. Step 3
  = 72,000 ÷ 360,000 × 100 = 20%.
Answer
ROCE = 20%.
Examiner tip
Capital employed includes non-current liabilities; use profit from operations.
4Expenses to revenue ratio (4 marks)
Building confidenceDirect calculation• expenses ratio, AO2
Question
Revenue $300,000; total expenses$ 66,000. Calculate the expenses to revenue ratio and state what it shows. (4 marks)
Step-by-step solution
1. Step 1
  Expenses to revenue = expenses ÷ revenue × 100.
2. Step 2
  = 66,000 ÷ 300,000 × 100 = 22%.
3. Step 3
  It shows that 22% of each $ of sales is absorbed by expenses.
Answer
Expenses to revenue = 22% (22 cents of every $ of sales goes on expenses).
Examiner tip
A lower ratio is better; it helps explain the profit margin.
5Compare gross and profit margins (5 marks)
StretchMulti-step problem• interpretation, AO3
Question
Year 1: gross profit margin 45%, profit margin 18%. Year 2: gross profit margin 45%, profit margin 12%. Explain what has happened and the likely cause. (5 marks)
Step-by-step solution
1. Step 1
  The gross margin is unchanged (45%), so buying/selling efficiency is the same.
2. Step 2
  But the profit margin has fallen from 18% to 12%.
3. Step 3
  The gap between the two margins has widened, meaning expenses have risen relative to sales.
4. Step 4
  Likely cause: higher operating expenses (e.g. wages, rent, depreciation) not matched by higher prices.
5. Step 5
  The business should investigate and control its expenses, since the problem is not in buying/selling.
Answer
Gross margin steady but profit margin fell → expenses rose relative to sales; investigate/control expenses.
Examiner tip
Steady gross margin + falling profit margin pinpoints rising expenses.
6Evaluate ROCE against borrowing cost (5 marks)
StretchWord problem• ROCE, AO3
Question
A company's ROCE is 9%. It can borrow at 11% interest. Explain what this comparison tells the directors. (5 marks)
Step-by-step solution
1. Step 1
  ROCE (9%) is the return the business earns on its capital.
2. Step 2
  The cost of borrowing (11%) is higher than this return.
3. Step 3
  So borrowing to invest in the business would cost more than it earns — it would reduce overall returns.
4. Step 4
  This suggests the company should improve its ROCE (raise profit or use capital better) before borrowing more.
5. Step 5
  Borrowing only makes sense when the return exceeds the cost of the finance.
Answer
ROCE (9%) is below the borrowing cost (11%), so borrowing to invest would destroy value; improve ROCE first.
Examiner tip
Always compare ROCE with the cost of finance — the key evaluation point.
7Causes of a falling gross margin (5 marks)
StretchWord problem• interpretation, AO3
Question
A retailer's gross profit margin has fallen from 38% to 32%. State and explain three possible causes. (5 marks)
Step-by-step solution
1. Step 1
  Lower selling prices (e.g. discounts/competition) reduce gross profit per sale.
2. Step 2
  Higher purchase costs (suppliers raising prices) that have not been passed on.
3. Step 3
  A change in sales mix toward lower-margin products.
4. Step 4
  Inventory theft or wastage, or under-recorded sales, inflating cost of sales relative to revenue.
5. Step 5
  The business should investigate pricing, suppliers and stock control.
Answer
Lower prices, higher purchase costs, lower-margin sales mix, or theft/under-recorded sales.
Examiner tip
Give distinct causes spanning price, cost, mix and control.
8How to improve ROCE (4 marks)
StretchWord problem• ROCE, AO3
Question
Suggest two ways a business could improve its return on capital employed. (4 marks)
Step-by-step solution
1. Step 1
  Increase profit from operations — raise revenue (volume/price) or cut costs/expenses, without raising capital.
2. Step 2
  Reduce capital employed — e.g. sell off underused non-current assets or reduce excess inventory/idle capital.
3. Step 3
  Either a higher numerator or a lower denominator raises ROCE.
Answer
Increase profit from operations (more revenue / lower costs) and/or reduce capital employed (sell underused assets).
Examiner tip
ROCE rises if profit rises or capital employed falls.
9Full set of profitability ratios (6 marks)
StretchMulti-step problem• profitability, AO2
Question
Revenue $500,000; cost of sales$ 300,000; expenses $120,000; profit from operations$ 80,000; profit for the year $60,000; capital employed$ 400,000. Calculate the gross profit margin, profit margin, expenses to revenue ratio and ROCE. (6 marks)
Step-by-step solution
1. Step 1
  Gross profit = 500,000 − 300,000 = 200,000; gross profit margin = 200,000 ÷ 500,000 × 100 = 40%.
2. Step 2
  Profit margin = 60,000 ÷ 500,000 × 100 = 12%.
3. Step 3
  Expenses to revenue = 120,000 ÷ 500,000 × 100 = 24%.
4. Step 4
  ROCE = 80,000 ÷ 400,000 × 100 = 20%.
Answer
Gross profit margin 40%; profit margin 12%; expenses to revenue 24%; ROCE 20%.
Examiner tip
Use profit from operations for ROCE and profit for the year for the profit margin.
10Overall evaluation of profitability (6 marks)
StretchWord problem• evaluation, AO3
Question
Year 1: gross margin 42%, profit margin 16%, ROCE 22%. Year 2: gross margin 40%, profit margin 11%, ROCE 14%. Evaluate the change in the company's profitability. (6 marks)
Step-by-step solution
1. Step 1
  Gross margin fell slightly (42% → 40%) — minor pressure on prices/costs.
2. Step 2
  Profit margin fell more (16% → 11%) — so expenses rose relative to sales, on top of the gross margin fall.
3. Step 3
  ROCE fell sharply (22% → 14%) — the business earns a much lower return on its capital.
4. Step 4
  Overall, profitability has worsened on every measure.
5. Step 5
  The biggest issue is expense control (profit margin fell more than gross margin) and the declining return on capital.
6. Step 6
  The directors should investigate rising expenses and how effectively capital is being used.
Answer
All three measures worsened; the profit margin fell more than the gross margin (rising expenses) and ROCE fell sharply (poorer use of capital).
Examiner tip
Compare each ratio, link the margins to expense control, and end with what to investigate.

Model Answers — Profitability Ratios

High-scoring sample answers for profitability ratios on the Cambridge IGCSE paper, with examiner-style notes mapping each response to the mark scheme and assessment objectives.

Question 1
9706 Paper 2 style4 marks
Q (4 marks). Revenue $320,000; cost of sales$ 192,000. Calculate the gross profit margin and the mark-up.
Model answer
Gross profit = 320,000 − 192,000 = 128,000. Gross profit margin = 128,000 ÷ 320,000 × 100 = 40%. Mark-up = 128,000 ÷ 192,000 × 100 = 66.67%.
Why this scores
Marking (point-based, 4). Gross profit (1); margin 40% (1.5); mark-up 66.67% (1.5).
Question 2
9706 Paper 2 style3 marks
Q (3 marks). Revenue $600,000; profit for the year$ 54,000. Calculate the profit margin.
Model answer
Profit margin = (profit for the year ÷ revenue) × 100 = 54,000 ÷ 600,000 × 100 = 9%.
Why this scores
Marking (point-based, 3). Formula (1); calculation (1); 9% (1).
Question 3
9706 Paper 2 style5 marks
Q (5 marks). A company has: profit from operations $90,000; issued share capital$ 250,000; reserves $150,000; 8% debentures$ 100,000. Calculate (a) the capital employed and (b) the return on capital employed.
Model answer
(a) Capital employed = issued shares + reserves + non-current liabilities = 250,000 + 150,000 + 100,000 = $500,000.

(b) ROCE = profit from operations ÷ capital employed × 100 = 90,000 ÷ 500,000 × 100 = 18%.
Why this scores
Marking (point-based, 5). Capital employed incl. debentures $500,000 (2.5); ROCE 18% (2.5).
Question 4
9706 Paper 2/3 style6 marks
Q (6 marks). Revenue $800,000; cost of sales$ 520,000; total expenses $160,000; profit from operations$ 120,000; profit for the year $96,000; capital employed$ 600,000. Calculate the gross profit margin, profit margin, expenses to revenue ratio and ROCE.
Model answer
Gross profit = 800,000 − 520,000 = 280,000.

Gross profit margin = 280,000 ÷ 800,000 × 100 = 35%.

Profit margin = 96,000 ÷ 800,000 × 100 = 12%.

Expenses to revenue = 160,000 ÷ 800,000 × 100 = 20%.

ROCE = 120,000 ÷ 600,000 × 100 = 20%.
Why this scores
Marking (point-based, 6). Gross margin 35% (1.5); profit margin 12% (1.5); expenses ratio 20% (1.5); ROCE 20% (1.5).
Question 5
9706 Paper 3 style6 marks
Q (6 marks). A business's gross profit margin was unchanged at 44% over two years, but its profit margin fell from 19% to 13%. Explain what this indicates and suggest what the directors should do.
Model answer
Because the gross profit margin is unchanged (44%), the business's buying and selling performance is the same — selling prices and cost of sales as a proportion of revenue have not deteriorated.

However, the profit margin has fallen from 19% to 13%, so the gap between gross profit and final profit has widened. This means expenses have risen relative to sales — the expenses to revenue ratio has increased. The cause is therefore in the running costs (e.g. wages, rent, distribution, administration), not in buying or selling.

The directors should:

investigate which expenses have risen and why, using the expenses-to-revenue ratio to target them;

look for cost savings or efficiency improvements in those areas;

consider whether the higher expenses brought any benefit (e.g. extra sales) before cutting them.

So the fall in profitability is an expense-control problem, and the focus should be on identifying and controlling the expenses that have grown.
Why this scores
Marking (point-based, ~6). Gross margin steady = buying/selling unchanged (~1.5); profit margin fell = expenses rose (~2); investigate/control specific expenses (~2.5).
Question 6
9706 Paper 3 evaluation style6 marks
Q (6 marks). A company's ROCE has fallen from 21% to 13% over two years. It can borrow at 10%. Evaluate what this tells the directors.
Model answer
The trend. ROCE has fallen sharply from 21% to 13%, so the company now earns a much lower return on the capital invested in it — either profit from operations has fallen, capital employed has risen (e.g. assets not yet generating returns), or both.

Comparison with the cost of borrowing. ROCE (13%) is still above the borrowing cost (10%), so the capital is still earning more than it costs to finance — borrowing to invest could, for now, still add value. However, the margin has narrowed (from 11 points to 3 points), so the company is closer to the point at which borrowing would no longer be worthwhile.

Implications.

The declining trend is a concern: if it continues, ROCE could fall below the cost of finance, making further borrowing value-destroying.

The directors should investigate why ROCE has fallen — falling profit from operations (margins/expenses) and/or rising capital employed (underused assets) — and take action to raise profit or use capital more efficiently.

Conclusion. ROCE is still acceptable relative to borrowing cost, but the sharp downward trend means the directors must act to restore it before it falls below the cost of finance.
Why this scores
Marking (point-based, ~6). Trend = lower return on capital (~2); ROCE vs borrowing cost still positive but narrowing (~2); investigate profit/capital + supported conclusion (~2).
Question 7
9706 Paper 3 style5 marks
Q (5 marks). Explain two ways a company could improve its return on capital employed, and one drawback of each.
Model answer
1. Increase profit from operations. The company could raise revenue (more volume or higher prices) or reduce costs/expenses, raising the numerator of ROCE. Drawback: higher prices could lose customers, and cutting costs too far could harm quality or service.

2. Reduce capital employed. The company could sell off underused non-current assets or reduce excess inventory/idle capital, lowering the denominator. Drawback: selling assets may reduce capacity for future growth, and cutting inventory too far risks stock-outs and lost sales.

Either approach raises ROCE (higher profit or lower capital), but each has a risk that must be weighed before acting.
Why this scores
Marking (point-based, 5). Increase profit + drawback (~2.5); reduce capital employed + drawback (~2.5).
Question 8
9706 Paper 2/3 style4 marks
Q (4 marks). A shop's gross profit margin has fallen from 36% to 30%. State two possible reasons and one action the owner could take.
Model answer
Possible reasons (any two):

Lower selling prices (e.g. discounting to compete), reducing gross profit per sale.

Higher purchase costs from suppliers that have not been passed on to customers.

(Also: a shift to lower-margin products, or inventory theft/wastage inflating cost of sales.)

Action: review pricing and suppliers (e.g. negotiate better purchase prices or adjust selling prices) and tighten stock control to stop losses.
Why this scores
Marking (point-based, 4). Two valid reasons (2); a sensible action (2).
Question 9
9706 Paper 2 style2 marks
Q (2 marks). State the formula for return on capital employed, including how capital employed is calculated.
Model answer
ROCE = (profit from operations ÷ capital employed) × 100, where capital employed = issued shares + reserves + non-current liabilities.
Why this scores
Marking (point-based, 2). ROCE formula (1); capital employed components (1).
Question 10
9706 Paper 3 evaluation style6 marks
Q (6 marks). Year 1: gross margin 38%, profit margin 14%, ROCE 19%. Year 2: gross margin 41%, profit margin 17%, ROCE 23%. Evaluate the change in the company's profitability.
Model answer
All three profitability measures have improved:

The gross profit margin rose (38% → 41%), so the company is making more gross profit per $ of sales — perhaps through higher prices, lower purchase costs or a better sales mix.

The profit margin rose more (14% → 17%), and since it rose by a similar amount to the gross margin, expenses have been controlled (the expenses-to-revenue ratio has not worsened).

ROCE rose (19% → 23%), so the company earns a better return on its capital — from higher operating profit and/or more efficient use of capital.

Conclusion. The company's profitability has improved on every measure: it earns more on each sale, controls its expenses, and generates a higher return on the capital invested. The improvement appears broad-based rather than driven by a single factor, which is a healthy sign — though the directors should check the improvements are sustainable (e.g. that higher prices are not losing customers).
Why this scores
Marking (point-based, ~6). Gross margin up (~1.5); profit margin up + expense control (~2); ROCE up = better return on capital (~1.5); supported conclusion (~1).

Key Formulae — Profitability Ratios

The formulae you need to memorise for profitability ratios on the Cambridge IGCSE paper, with every variable defined in plain English and a note on when to use it.

Gross profit margin (%)
$\frac{Gross\ profit}{Revenue} \times 100$
$Gross profit$
revenue − cost of sales
$Revenue$
sales for the period
When to use
To measure gross profit as a percentage of sales.
Example
100,000 ÷ 250,000 × 100 = 40%.
Mark-up (%)
$\frac{Gross\ profit}{Cost\ of\ sales} \times 100$
$Cost of sales$
cost of the goods sold
When to use
To measure gross profit as a percentage of cost.
Example
100,000 ÷ 150,000 × 100 = 66.67%.
Profit margin (%)
$\frac{Profit\ for\ the\ year}{Revenue} \times 100$
$Profit for the year$
final profit after all expenses
When to use
To measure final profit as a percentage of sales.
Example
60,000 ÷ 500,000 × 100 = 12%.
Return on capital employed (%)
$\frac{Profit\ from\ operations}{Capital\ employed} \times 100$
$Profit from operations$
profit before interest and tax
$Capital employed$
issued shares + reserves + non-current liabilities
When to use
To measure the return earned on the long-term capital invested.
Example
80,000 ÷ 400,000 × 100 = 20%.
Expenses to revenue ratio (%)
$\frac{Expenses}{Revenue} \times 100$
$Expenses$
total (or operating) expenses for the period
When to use
To measure the proportion of sales absorbed by expenses.
Example
120,000 ÷ 500,000 × 100 = 24%.

Key Definitions and Keywords — Profitability Ratios

Definitions to memorise and the exact keywords mark schemes credit for profitability ratios answers — sharpened from recent examiner reports for the 2026 Cambridge IGCSE sitting.

Gross profit margin
Examiner keyword
Gross profit as a percentage of revenue: (gross profit ÷ revenue) × 100.
Mark-up
Examiner keyword
Gross profit as a percentage of cost of sales: (gross profit ÷ cost of sales) × 100.
Profit margin
Examiner keyword
Profit for the year as a percentage of revenue: (profit for the year ÷ revenue) × 100.
Return on capital employed (ROCE)
Examiner keyword
Profit from operations as a percentage of capital employed; measures the return on long-term capital.
Capital employed
Examiner keyword
Issued shares + reserves + non-current liabilities; the long-term capital invested in the business.
Expenses to revenue ratio
Examiner keyword
Expenses as a percentage of revenue: (expenses ÷ revenue) × 100.
Profit from operations
Profit before finance costs (interest) and tax; the numerator of ROCE.

Common Mistakes and Misconceptions — Profitability Ratios

The traps other students keep falling into on profitability ratios questions — taken from recent Cambridge IGCSE examiner reports and mark schemes — and how to avoid them.

✕Using the wrong base for margin vs mark-up
9706 Examiner Reports
Why it happens
Both relate gross profit to a base.
How to avoid it
Margin is on REVENUE; mark-up is on COST OF SALES. Choose the right denominator.
✕Using profit for the year (after interest) for ROCE
9706 Examiner Reports
Why it happens
Using the final profit figure.
How to avoid it
ROCE uses PROFIT FROM OPERATIONS (before interest), to match the capital employed (which includes debt).
✕Calculating capital employed incorrectly
9706 Examiner Reports
Why it happens
Omitting non-current liabilities.
How to avoid it
Capital employed = issued shares + reserves + NON-CURRENT LIABILITIES (per the appendix).
✕Using a non-appendix formula
9706 syllabus note
Why it happens
Memorising a different version.
How to avoid it
Use only the formulae in the syllabus appendix — these are the only ones accepted.
✕Calculating ratios but not interpreting them
9706 Examiner Reports
Why it happens
Stopping at the number.
How to avoid it
For 'evaluate/comment', explain what the ratio means, compare it, and suggest causes/actions.
✕Confusing gross profit margin with profit margin
9706 Examiner Reports
Why it happens
Both are 'margins'.
How to avoid it
Gross profit margin uses GROSS profit; profit margin uses the PROFIT FOR THE YEAR (after expenses).

Profitability Ratios

Detailed Study Notes

At a glance

What you’ll learn

Quick recap

Memorise this

How it’s examined

Take this whole topic with you

1Gross profit margin and mark-up (4 marks)

2Profit margin (3 marks)

3Return on capital employed (5 marks)

4Expenses to revenue ratio (4 marks)

5Compare gross and profit margins (5 marks)

6Evaluate ROCE against borrowing cost (5 marks)

7Causes of a falling gross margin (5 marks)

8How to improve ROCE (4 marks)

9Full set of profitability ratios (6 marks)

10Overall evaluation of profitability (6 marks)

Gross profit margin (%)

Mark-up (%)

Profit margin (%)

Return on capital employed (%)

Expenses to revenue ratio (%)

Gross profit margin

Mark-up

Profit margin

Return on capital employed (ROCE)

Capital employed

Expenses to revenue ratio

Profit from operations

✕Using the wrong base for margin vs mark-up

✕Using profit for the year (after interest) for ROCE

✕Calculating capital employed incorrectly

✕Using a non-appendix formula

✕Calculating ratios but not interpreting them

✕Confusing gross profit margin with profit margin