Accounting - Ratios

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ROCE - Return on capital employed

  • Net Profit divided by Capital Employed
  • X 100
  • =%
  • Capital employed = owner's capital including retained profits and long term liabilities
  • Most exams use Balance sheet total at end of year with no long term liabilities
  • Low ROCE:
    • Inability to generate sufficient sales from investing assets of business
    • Inability to earn adequate profits from sales due to failure to control costs
  • Compare against:
    • Alternative potential investments(other business)
    • ROCE earned by competitors
    • ROCE earned in previous periods

Gross Profit Margin

  • Gross Profit divided by Sales
  • x 100
  • =%
  • Causes of reducing Gross Profit Margin
    • Low selling prices
    • Purchases prices too high
  • Compared against
    • Previous periods
    • Competitors

Net Profit Margin

  • Net Profit divided by Sales
  • x 100
  • =%
  • Causes of reducing net profit margin
    • Selling price too low
    • Costs too high, management should look to cut any non-essential expenses
  • Can be compared…

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