Net profit margin
The net profit is the profit the business has made after deducting the expense and tax.
Formula
Net profit/turnover x 100
Working out – £349.810/£845,000
Answer = 41.37%
This mean that out of every £1 of profit the business makes the business keeps 41.3%. So this is a good figure has the business keeps 41.3 business makes a lot and this money would be invested back in stock. This suggests that if the business makes £349,810 of net profit form a turnover of £845,500 it will have a net profit percentage of 41.37%. So this means that the business makes a net profit of 41.37 percent after deducting all the expenses.
Return on capital employed
Return on capital employed measure the level of profit compared to the value of net assets invested in your business
Formula – Net profit/capital employed x 100
Working out - 349,810/1,600,000 x100
Answer = 21.86%
This means that the company is making 22 % on the money they have invested in the company i.e. return on capital employed ratio. This indicates that the business is utilising its assets wisely has it has a high figure.
Sales to cost of sales
Formula – sales/cost of sales
Working out - 845,500/188,000
Answer = £4.49
This means that out of every 1 pound of cost of sakes the business is making £4.49 of sales. This is very good for the business has it helps them make substantial sales and then this would make them substantial profits.
Efficiency ratio
There are three main ratios which can be used to measure the financial efficiency of a business.
- Asset turnover ratio
- Stock turnover ratio
- Debtor day ratio
Stock turnover ratio
This measures the number of times in a 12 month period that the business sells its stock.
Formula
Average Stock/Cost of goods sold/365
Working out - 21,000/515.06 x 365
Answer = 40.7
This means that the business would turn its stock over every 41 days on average. However, care must be taken when comparing the stock turnover ratio of different businesses, since a supermarket, for example, is likely to have much higher stock turnover.
Debtor’s day ratio
This shows how long, on average a business takes to collect the debts owed to it by its customers who have purchased their good on credit.
Formula
Debtors/sales turnover x 365
Working out - 34,981/845,500 x 365
Answer = 15 days
This means that on average it takes the business 15 days to collect its trade debts. This is a good sign of the business keep on track of its debtors and collecting it quickly enough.
