profitability ratios

profitability ratios

1. Profitability

   • Assess the trading or operating profits of the company.
   • ROCE (%) = Operating Profits / Capital Employed x 100
     • Seen as the best ratio for measuring overall management performance, in relation to the capital that has been paid into the business.
   • Profit Margins
     • Gross Profit / Revenues x 100
     • Operating Profit / Revenues x 100
   • Asset Turnover
     • Turnover / Assets (Capital) Employed
     • Operational Gearing Ratio = Revenue - Variable Cost / Profit
       • A measure of operational risk, ie, risk to the operating profit figure. It assesses the levels of variable and fixed operating costs in the business.
       • Fixed costs
         • Level remains constant regardless of output levels (eg rent, rates, depreciation).
       • Variable costs
         • Varies with output (eg raw materials)
       • Contribution
         • The difference between the unit revenue and the unit variable cost.  This is the amount that the company has to pay towards or contribute to paying for its fixed costs before it is able to determine its profit before tax.

2. Gearing

3. Liquidity

   • solvency / liquidity
   • Working Capital or Current Ratio = Current Assets / Current Liabilities
     • Current assets = recoverable within 1 year.
   • Quick Ratio or Acid Test Ratio = Current Assets - Inventory / Current Liabilities
   • Acid Test Ratio (alternative) = Cash + Marketable Securities + Accounts Receivable / Current Liabilities

4. Investment Returns

5. Gearing