what is the limitations of gross profit margin in assessing profitability?
GPM measures the average mark up by calculating the % of sales revenue that is retained as gross profit. Indeed, a greater gap between selling price and cost price could be interpreted as having a higher average mark up. Yet through the formula of GPM (gross profit/sales revenue x 100) how can we deduce whether an increase in GPM is attributed to a decrease in cost price where selling price remains constant or to a decrease in both selling price and cost price where cost price has decreased by more? Well, this could be considered as a limitation of the GPM formula. As profitability is seen as the ability of the firm to earn profit measured by comparison against a base (in this case gross profit and sales revenue) we are limited in assessing profitability solely based on the GPM formula.
how are some of the profitability indicators linked/explain how a change in one affects the other?
The most common link I have come across is asset turnover, net profit margin and return on assets (you can derive the ROA formula based on the other 2 aforementioned). ATO measures how productively a firm has used its assets to earn revenue whilst NPM measures expense control and ability to retain sales revenue as net profit. The ROA depends on the ability of the firm to use its assets to generate revenue and control its expense, a link to both the NPM and ATO formula. Have a shot at making arbitrary numbers for net profit, sales etc. and change them around to see the affect on ROA.
Hope this helps.
EDIT: ROA to ATO* (Thanks Mars)