Accounting - Ratios

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…