16. calculation and interpretation of profitability ratios

capital employed =

capital + non-current liabilities

net profit percentage

profit of the year/sales revenue

gross profit percentage

gross profit/sales revenue

return on capital employed (ROCE)

profit of the year/capital - non-current liabilities

OR

profit of the year/total assets - current liabilities

if ROCE is low:

• pursuing a higher margin, lower volume strategy

increase in ROCE

• higher ROCE is driven by net profit percentage

• will increase if a long term loan is paid

gross profit percentage increases bc understatement of closing inventory = _____

cost of sales increase

if admin expenses increase, NPM _____

purchases increase = expense increases = NPM _____

lowering wages expense = NPM _____

investment in PPE will result in an increased depreciation charge = expenses increase = NPM _____

decreases

decreases

increases

decreases

closing capital =

opening capital + new capital introduced + profit - drawings