ROCE, Acid Test Ratios, Profit Margins, Working Capital as Ratio

Overview of the four ratios in Business Studies.

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  • Created by: dansydes
  • Created on: 13-12-11 16:28

ROCE

  • Return on Capital Employed
  •  
  • ROCE = (Net Profit x 100) / Capital Employed
  • Used for comparisons
  • How much net profit made to money spent
  • E.g. Nintendo has capital employed of $3 billion & a net profit of $7 billion. Playstation has CE of $7 billion and a NP of $12 billion. Nintendo = (7x100)/3 = 233.3% and Playstation - (12x100)/7= 171.4%. Nintendo is the more successful business.
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Acid Test Ratios

  • To see if a business has enough working capital
  • Doesn't include stock (normally sold at a loss)
  • ATR= (Debtors + Cash) : Current Liabilities

 

  • E.g. Debtors  = $50 cash = $50 CL = $30. ATR = (50 + 50) : 30 = 100:30= 10:3
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Profit Margin

  • Ratio of the profit to the sales
  • Measured $1 per sale

 

  • Gross Profit Margin = gross profit/sales rev (turnover)
  • E.g. gross profit margin = (150,000 - 50,000)/150,000 = $0.66 per $1 sales

 

  • Net Profit Margin = net profit/sales rev
  • E.g. net profit margin = 50,000/150,000 = $0.33 per $1 sales
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Working Capital as Ratio

  • Working capital in ratio form
  • E.g. A business with $10,000 current assets and $5,000 current liabilities has 2:1 ($1 of liabilities for every $2 of assets.)
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