Ratios

Revision Cards for ROCE, Profit Margin, Acid Test Ratio, Working Capital

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  • Created by: dansydes
  • Created on: 13-12-11 16:32

ROCE

Return On Capital Employed(ROCE)

Formula: (100 x Net Profit)/Capital

Example: Net Profit = $5000

Capital = $100,000

ROCE = (100 x 5000)/100,000 = 5%

ROCE is very useful to compare businesses to see how much money they are getting back from their original investment

 

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Profit Margin

A ratio of the profit to the sales measured for every $1 of sales.

Gross Profit Margin = Gross Profit/ Sales Revenue

Net Profit Margin = Net Profit/Sales Revenue

Example: Resturaunt makes 100,000 of sales with a gross profit of 50,000 & a net profit of 35,000.

Gross Profit Margin = 50,000/100,000 = $0.50 of Gross Profit for every $1 of sales

Net Profit Margin = 35,000/100,000 = $0.35 of Net Profit for every $1 of sales.

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Acid Test Ratio

This does not include stock because (normally) CA stock is sold at a loss

This can be used to see if the business has enough working capital

ATR = (Debtors + Cash): Current Liabilities

Example:

Debtors = 50

Cash = 50

Current Liabilites = 30

ATR = (50+50):30 = 100:30 = 10:3

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Working Capital As A Ratio

It should be atleast 1:1

Working Capital Ratio = CA:CL

Example:

Current Assets = $15,000 

Current Liabilities = $3000 

Working Capital Ratio = 15,000:3000 = 5:1

So for every 1 dollar of CL the business has it has 5 dollars of CA

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