FA 2, 6

  1. Return on Capital Employed (ROCE)

    • Formula: ROCE = Operating Profit / Net Capital Employed.

    • Alternative Formula: ROCE = Operating Profit Margin (OPM) x Asset Turnover (AT).

      • OPM = Operating Profit / Revenue.

      • AT = Revenue / Capital Employed.

    • Goal: Assess a company’s efficiency in generating profit from its capital.

  2. Return on Equity (ROE)

    • Formula: ROE = Profit / Equity.

    • Du Pont Analysis: ROE = Profit Margin (PM) x Total Asset Turnover (TAT) x Equity Multiplier (EM).

      • PM = Profit / Revenue.

      • TAT = Revenue / Total Assets.

      • EM = Total Assets / Total Equity.

    • Alternate Calculation: ROE = Return on Assets (ROA) x Equity Multiplier.

    • Purpose: Shows how effectively a company uses equity to generate profit​

  1. Categories of Ratios

    • Performance (Profitability).

    • Liquidity (Solvency).

    • Efficiency (Working Capital Management).

    • Return on Investment and Risk.

  2. Investment Ratios

    • Measure shareholder returns and are crucial for decision-making.

    • Focused on Dividend Yield and Earnings per Share (EPS).

  3. Gearing Ratios

    • Indicates the proportion of debt vs. equity financing, highlighting financial risk.

    • Formula: Gearing = (Fixed Interest Capital / Equity Capital).

    • Implications: High gearing amplifies profits but also increases risk during economic downturns​

  1. Receivables Collection Period

    • Measures the average days it takes to collect credit sales.

    • Commonly around 45 days but varies by industry.

    • Limitations: Often uses only credit sales, which can distort results.

  2. Payables Payment Period

    • Calculates the average days taken to pay suppliers.

    • Limitations: Often calculated from Cost of Sales if purchases aren’t available, which may distort accuracy.

  3. Inventory Turnover Ratio

    • Shows how many times a business sells its average inventory annually.

    • Can be inverted to express as Inventory Days.

    • High turnover indicates efficient inventory management; low turnover may suggest overstocking or slow sales​