ROCE

ROCE, Acid Test, Profit Margin, Working Capital

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  • Created by: dansydes
  • Created on: 13-12-11 16:08

ROCE

ROCE = Return on Capital Employed...

Formula= (100 x netprofit) / Capital...

Example:

Netprofit= $5,000...

Captal= $100,000...

ROCE= (100x5000)/ 100,000 = 5 = 5% (remeber ROCE is a percentage)...

For every $1 the company invests, they get $1.05 in return. Roce is very useful for comparing businesses about how much return they are getting from their intial investiment.

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Working Capital as a Ratio

Working Capital is a ratio. Its ratio is current assets: current liabilities...

Working Capital as a ratio should be at least 1:1, if it is not then that means that a business has a bad working capital...

Example:

A business with $10,000 current assets and $5,000 current liabilities has 2:1 ratio. This business has a good working cpaital because their ratio is at least 1:1 infact its better because for every $1 of liabillities they have $2 of assers.

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Acid Test Ratio

Acid test ratio (ATR)is used to see if  a business has enough working capital. ATR doesnt not include stock because, usually, stock has to be sold at a loss.

ATR = (Debtors + Cash):Current liabilities

Example:

Debtors = $50

Cash = $50

CL = $30

ATR = (50 + 50):30 = 100:30 = 10:3   

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Profit Margin

 Profit margin is basically a ratio of the profit to the sales, it is measured per evey $1 of sales

Gross profit margin = gross profit/Sales Rev

Net profit margin = net profit/Sales Rev

E.g. A samll retail store made $150,000 sales, $100,000 gross in 2010 and $75,000 net in 2010

Gross profit margin = 100000/150000 = 0.666 = $0.67 per $1 sales

Net profit margin = 75000/150000 = 0.5 = $0.50 per $1 sales

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