Unit 2 Exploring Business Activity P6 - ratios

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Unit 2: Exploring Business Activity Assignment 3 P6

Profitability Ratios

Return on capital employed (ROCE)

Net Profit / Average capital employed   x 100 = % return

This ratio measures the efficiency of capital investments. It is worked out by considering the net profit as a percentage of the capital employed by that business. The reason this ratio is so useful is because it shows the amount of money an investor is receiving back on their capital as a percentage.

Return on Net Assets

Net Profit for year / Net Assets x 100 = % return

Gives a percentage of how much return of net assets the business is getting from its investments.

Gross Profit %

Gross Profit / Sales x 100 = Gross Profit %

This gives the gross profit percentage which is the profit made over a period without taking into account the operating costs or taxation. The higher the gross profit the better. Gross profit percentage is also sometimes called gross profit margin and the calculation shows how well the business is managing its purchases of stock.

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Net Profit %

Net Profit / Sales x 100 = Net Profit %

This is the next step from gross profit and subtracts the operating costs and tax to give the net profit, or overall profit. This ratio shows how well the business manages its other expenses, especially when it is compared to the gross profit percentage. If a business has a high gross profit percentage but a low net profit percentage its operating costs (i.e. staff, petrol, rent, insurance and wages) are too high as they are taking too much profit from the business.


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