AQA · GCSE · Business

    Course version: 8132 · Version from Sept 2017

    Calculate gross profit margin and net profit margin to help assess…

    Full specification wording

    Analysing the financial performance of a business: calculate gross profit margin and net profit margin to help assess financial performance.

    Profit margins express profit as a percentage of revenue, making comparison easier.

    Checked against the AQA 8132 specification (opens in a new tab) on .

    • Point 9 of 9
    • 3 key terms

    Study notes

    From the checked teaching notes for this specification point.

    The idea

    Profit margins express profit as a percentage of revenue, making comparison easier. Gross profit margin = (gross profit ÷ revenue) × 100. Net profit margin = (net profit ÷ revenue) × 100. For example, revenue £200,000, gross profit £80,000 and net profit £30,000 give a gross profit margin of 40% and a net profit margin of 15%. The gross margin shows trading efficiency before overheads; the net margin shows overall profitability after all expenses. A falling net margin may mean rising overheads or interest, even if gross margin is stable. Use both margins, and compare them over time or with competitors, to assess financial performance.

    What earns the marks

    • States the correct formula for gross profit margin: (gross profit ÷ revenue) × 100.
    • States the correct formula for net profit margin: (net profit ÷ revenue) × 100.
    • Substitutes the correct profit and revenue figures into each formula.
    • Calculates each margin accurately and expresses it as a percentage.
    • Uses the calculated margins to comment on financial performance, such as profitability or cost control.

    Common mistakes and how to put them right

    • Dividing revenue by profit instead of profit by revenue.

      Put it right: Divide the profit figure by revenue.

    • Forgetting to multiply by 100, leaving the answer as a decimal.

      Put it right: Multiply by 100 to convert to a percentage.

    • Using the same profit figure for both margins.

      Put it right: Use gross profit for the gross margin and net profit for the net margin.

    Exam tips

    • Write the formula before substituting numbers to secure method marks.
    • Show each step of the calculation, including the division and multiplication by 100.
    • Round percentages to one or two decimal places and include the % sign.

    Try the lesson

    The start of the Analysing the financial performance of a business: calculate gross profit margin and net profit margin to help assess financial performance. lesson, made from checked teaching notes for this specification point.

    Have a go first

    A business has a gross profit of £100,000 and revenue of £500,000. What is its gross profit margin?

    Listen

    Profit margins express profit as a percentage of revenue, making comparison easier. Gross profit margin = (gross profit ÷ revenue) × 100. Net profit margin = (net profit ÷ revenue) × 100. For example, revenue £200,000, gross profit £80,000 and net profit £30,000 give a gross profit margin of 40% and a net profit margin of 15%. The gross margin shows trading efficiency before overheads; the net margin shows overall profitability after all expenses. A falling net margin may mean rising overheads or interest, even if gross margin is stable. Use both margins, and compare them over time or with competitors, to assess financial performance. A strong answer earns marks for these points. States the correct formula for gross profit margin: (gross profit ÷ revenue) × 100. States the correct formula for net profit margin: (net profit ÷ revenue) × 100. Substitutes the correct profit and revenue figures into each formula. Calculates each margin accurately and expresses it as a percentage. A common slip: Dividing revenue by profit instead of profit by revenue. Instead, divide the profit figure by revenue. Exam tip: Write the formula before substituting numbers to secure method marks.

    See it

    A top-down flowchart. At the top is a node labelled Revenue, which branches to two nodes: Gross profit and Net profit. Gross profit leads to a node giving the gross profit margin formula: gross profit divided by revenue, multiplied by 100. Net profit leads to a node giving the net profit margin formula: net profit divided by revenue, multiplied by 100. The gross margin formula leads to a node stating that the gross margin shows trading efficiency before overheads. The net margin formula leads to a node stating that the net margin shows overall profitability after all expenses. Both of these final nodes lead to a single node stating that both margins are used to assess financial performance.
    Shows how revenue links to gross profit and net profit, how each margin is calculated, and how both margins are used to assess financial performance.

    Key words

    Say what each word means before you turn the card.

    Gross profit margin

    Try answering aloud or in your head before turning the card.

    Net profit margin

    Try answering aloud or in your head before turning the card.

    Financial performance

    Try answering aloud or in your head before turning the card.

    See every definition
    Gross profit margin
    Calculated as (gross profit ÷ revenue) × 100, it shows trading efficiency before overheads.
    Net profit margin
    Calculated as (net profit ÷ revenue) × 100, it shows overall profitability after all expenses.
    Financial performance
    Assessed by using both margins and comparing them over time or with competitors.

    Label the diagram

    Some boxes have lost their names. Pick the right name for each number.

    The diagram again, with 3 boxes numbered instead of named. A top-down flowchart. At the top is a node labelled Revenue, which branches to two nodes: Gross profit and Net profit. Gross profit leads to a node giving the gross profit margin formula: gross profit divided by revenue, multiplied by 100. Net profit leads to a node giving the net profit margin formula: net profit divided by revenue, multiplied by 100. The gross margin formula leads to a node stating that the gross margin shows trading efficiency before overheads. The net margin formula leads to a node stating that the net margin shows overall profitability after all expenses. Both of these final nodes lead to a single node stating that both margins are used to assess financial performance.

    • 1Box 1

    • 2Box 2

    • 3Box 3

    0 of 3 labelled

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