Profitability Measures
Gross/Net Profit/Sales Revenue X 100% = Margin (%)
This rate measures the gross/net profit per unit of sales. It is very important to note the trend in this ratio. If there is a downswing it should be investigated immediately.
Sales Revenue/Total Assets = Turnover
This ratio examines the use of assets. The more intensively the assets of a business are used the greater the potential for profit. A shop with few assets will have a sales to assets ratio of 10 or higher whereas a capital intensive business, such as a mine or power station, will have a figure of less than 1.
Net Profit/Total Assets x100 = Return on Investment %
This figure will produce the single most important measure in business – the return on investment (ROI). If the return on investment is lower than the cost of the capital needed to undertake the investment, then the business will fail.
Net Profit After Interest & Taxes/ Owner’s Capital = Return to the Owners %
A business will always want to know if he/she is wise to continue in the business. This figure will reveal the return being earned on his/her investment.
Return On Capital Employed
ROCE is a very useful ratio to evaluate overall business performance over time, is based on a snapshot of a business’s balance sheet for it’s return on investments (ROI) and the percentages will vary between industries. It also can as a benchmark when comparing figures to competitors.
| Company X | Company Y (Euros) | |
| Non Current Liabilities | 400,000 | 600,000 |
| Reserves | 900,000 | 900,000 |
| Share Capital | 600,000 | 1,200,000 |
| Total Equity | 1,500,000 | 2,100,000 |
| Operating Profit | 300,000 | 500,000 |
(Operating Profit/(Total Equity + Non Current liabilities ) X100%
Company X: 300,000/(1,500,000+400,000)
= 300,000/1,900,000 x 100% = 15.8% ROCE
Company Y: 500,000/ ( 2,100,000 + 600,000)
=500,000/2,700,000 X 100% = 18.5% ROCE