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What is ratio analysis?
Analysing relationships
between financial data
to assess the
performance of a
business…read more

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Ratios can help answer Q's like...
Profitability Is the business making a profit? Is it growing?
How efficient is the business at turning revenues into profit?
Is it enough to finance reinvestment?
Is it sustainable (high quality)?
How does it compare with the rest of the industry?
Financial Is the business making best use of its resources?
efficiency Is it generating adequate returns from its investments?
Is it managing its working capital properly?
Liquidity and Is the business able to meet its short-term debts?
gearing Is the business generating enough cash?
Does the business need to raise further finance?
How risky is the finance structure of the business?
Shareholder What returns are owners gaining from their investment?
return How does this compare with alternative investments?…read more

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Profitability ratios
Gross Profit Margin *
Operating Margin *
ROCE
* Covered in BUSS2…read more

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Return on Capital Employed
Operating profit
ROCE (%) = x 100
Capital employed
Example
Operating profit = £280,000
Capital employed = £1,400,000
ROCE = £280,000 / £1,400,000 = 20%…read more

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Evaluating ROCE
Higher % is better
ROCE Watch for trend over time
% Watch out for low quality
profit which boosts ROCE
Leased equipment will not be
included in capital employed…read more

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