PROFITABILITY RATIOS - ROCE Flashcards
What does ROCE stand for
ROCE stands for: Return on capital employed
What are profitability ratios
These measure how efficetnt a firm is when generating profit
What is return on capital empoyeed (ROCE)
Measures the efficiency with which a firm generates profit from the money invested into the business.
What is the formula for working out ROCE
Operating profit/ (total equity + non-current liabilities) X 100
What is gross profit margin
A measure of a firm’s profitability by looking at the relationship between net profit and sales revenue
What is the formula for working out gross prfit margin
Operating profit/ sales revenue X 100
What is profit for the year margin
A measure of a firm’s profitablity by looking at the relationship between net profit and sales revenue.
WHat is the formula for working out profit for the year margin
Profit for the year / sales revenue X 100
What is operating profit
Operating profit = Revenue - total costs (money from normal day to day activities - Also excluding tax)
What is total capital employed
Total capital employed = The amount of money that has been invested into the business
What are some ways to improve ROCE
Increase revenue without increasing costs
Cut costs without reducing revenue
Increase operational profit - (If you can improve operating profit without increasing capital employed, that will increase the return on capital employed)
Pay back long term loans
Share buyback
Increase dividend payments
Reduce total capital employed - These are all measures to reduce capital employed
Interpreting ROCE
The higher the better - an improving figure over time is a sign of improving performance
Can be compared with interest rates to judge if money would be better off in the bank or invested in the company
Most companies would be happy with 15% - 20% ROCE
