Impact of Markup on Profitability Ratios : Evidence from Finland

Abstract

The objective of the study is to show how the markup affects key ratios of profitability. Markup is an important tool for pricing planning and control, but little research has been done on it from a business management perspective. In this study, a simple mathematical model is developed to demonstrate the connection between markup and profitability ratios. In addition to the markup, key factors influencing the ratios are the average lag between expenditures and revenues, which is connected to the company’s expenditure structure and industry. In addition to markup and average lag, key ratios are also affected by the company’s growth. The results of the study are illustrated in artificial data (100 randomized observations) and empirical data (733 Finnish companies). The results show that markup has a strong influence on profitability ratios, but other factors cause considerable fluctuations in the values of the ratios. However, profit margin is affected only by markup.