a c c o u n t s d e m y s t i f i e d
Since operating profit is what we have left after paying the oper-
ating expenses, it obviously makes sense to analyse the operating
expenses and see if there is anything we can learn.
The capital employed in a business is made up of both fixed assets
and working capital. Working capital is, in turn, made up of vari-
ous different elements. We can therefore analyse each of these
In the same way that we looked at how many sales we got for each pound
of assets and how much profit we got for each pound of sales, we will
analyse all the expenses and the constituents of capital employed in rela-
tion to sales.
The P&L lists three types of expense: cost of goods sold, distribution and
administration. Let’s look at these three first.
Cost of goods sold, gross margin
As you will remember, the cost of goods sold (‘COGS’) is exactly what it
says – the cost of buying and/or making the goods to be sold. From the
P&L, we know that Wingate’s cost of goods sold in year five was £8,078k.
We can therefore divide this by the sales of £10,437k to give us cost of
goods sold as a percentage of sales (‘COGS%’).
COGS% = COGS / Sales
= 8,078 / 10,437
We also saw earlier that the profit left after subtracting cost of goods sold
from sales is known as gross profit. Gross profit as a percentage of sales is
known as gross margin.
Gross margin = Gross profit / Sales
= 2,359 / 10,437