- Created by: sofiasalvaggio
- Created on: 25-01-21 17:29
return on capital employed (ROCE)
- measure of return on investment
ROCE IS USEFUL TO-
- evaluate the overall performance of the business
- provide a target return for individual projects
- benchmark performance with competitors
roce % - operating profit\ total equity+ non current liabilities x100
-roce will vary between industries
-it is based on a snapshot of a balance sheet
-comparisons over time and with key competitors is most useful
ROCE IS A WIDELY USED MEASURE OF RETURN ON INVESTMENT BY A BUSINESS.
Liquidity ratios- current ratio
liquidity ratios assess whether a business has sufficient cass or equivalent current assets to be bale to pay its debts.
current ratio - current assets\ current liabilities
evaluating the current ratio:
- a ratio of 1.5 to 2.5 is accceptable liquidity and efficient management of working capital
- low ratio indicates possible liquidity problems
- high ratio = too much working capital tied up in inventories or debtors
for top grade evaluation on current ratio-
- industry and market matters- firms have different requirements for holding inventories
- how does the current ratio compare with competitors
- the trend is more important- a sudden deterioration in current ratio is a good indicatior of liquidity problems
acid test ratio
acid test ratio - curent assets - stock \ current liabilities
evaluating acid test ratio
- a better indictaor of liquidity problems that usually hold inventories
- less than 1 is often bad news
- look out for - less relevance for businesses with high stock turnover
- trends : significant deterioration in the ratio indicate a liquidity problem.
- measures the proportion of a businesses capital provided by debt
gearing ratio % non-current liabilities\ total equity + non- current liabilities x 100
- gearing ratio of 50% plus is normally considereed high
- below 20% is said to be low
- level of acceptable gearing depends on business and industry
benefits of high gearing -
- less capital required to be invested by the shareholders
- -debt is a relatively cheap source of finance compared with dividends.
- -easy to pay interest if profits and cashflows are strong
benefits of LOW gearing-
- less risk of defaulting on debts
- business has capacity to add debt if required
- shareholders call the shots rather than debt holders
helps answer questions such as
- why is one business more profitable than the other?
- returns from investment?
- is a business able to stay solvent?
3 main groups of ratios
- profitability - gross profit margin, operating profit margin, ROCE
- liquidity - acid test ratio, current ratio
- financial efficiency- payable days, recieveable days, gearing, inventory turnover
window dressings- a manipulation of financial statements to show more favourable results of the business- used to mislead investors
ratios dont tell you:
- competititve advantages, quality, ethical reputation, future prospects, changes in external environment