Ratios

Cards to revise ROCE, Working Capital Return, Acid Ratio, Profit Margin

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  • Created by: dansydes
  • Created on: 13-12-11 16:33

ROCE

Stands for Return on Capital Employed

(100 x Net Profit) / Capital

Net profit = $5,000

Capital = $100,000

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

= $5 = 500%

 

ROCE is very useful for comparing businesses about how much return they are getting from their initial investement.


 

 

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Return of Working Capital as Ratio (WCR)

Current Assets - Current Liabilites

A business has $1,000 in current assets and $55 in current liabilites calculate the WCR.

WCR = $1,000 - $55

WCR = 1000 : 55
              +5

Working Capital Ratio = 200 : 55

Commonly used in balance sheets

 

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Profit Margin

A ratio of the profit to the sales. Measured per $1 pf sales. There are 2 kinds

Gross Profit Margin: Profit that the business earns from selling goods before overhead costs have been deducted

Sales Rev - Cost of sales = GP

Sales Rev is found easily by doing Price of product x Quantity sold

GPM = Gross Profit/Sales Rev

Net Profit Margin

The true profit that the business earns from selling goods, after deducting overheads.

Sales Rev - cost of sales - Overheads = NP

NPM= Net Profit/Sales Rev

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Acid Test Ratio

ATR

A check to see if a business has enough working capital

ATR = (Debtors+Cash):Current Liabilities

Example:

On a balance sheet it shows debtors=$50 and Cash=$50 Current liabilites=$30

ATR=(50+50):30

       =100:30

        +10

        =10:30

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