Profitability

NotesQuizObjective Test

Return on Capital Employed

ACCA-FA-H2aib-How-to-calculate-ROCE

ROCE

This is a measure of management’s overall efficiency in using the finance/assets

  • ROCE will increase if less PPE is in the accounts

    So old PPE will give a higher than usual ROCE

    ROCE will decrease if more PPE is in the accounts

    So, Revaluations upwards will give a lower than usual ROCE

  • ROCE will increase if less expenses (except interest and tax) are in the accounts

  • ROCE will decrease if more loans / share issues are made that year - especially near the year end

ROCE can be broken down (explained by) 2 more ratios:

Operating Margin
Asset Turnover

So if Operating Margin is up and ROCE is down - Net Asset Turnover must be down a lot

(The assets aren't producing the amount of sales they used to)

ratio_-13

Operating Margin

= Operating Profit (PBIT) / Sales

Asset Turnover

= Sales / Capital Employed

Gross Margin

ACCA-FA-H2aib-Gross-profit-margin

Gross Margin is affected by..

An increase in the sales PRICE or decrease in COS PRICE

An increase in gross profit as a whole doesn't necessarily mean an increase in the margin - as it could be due to more volume and nothing to do with the price

  • Inventory measured in different ways (as this affects "price")

  • Inventory write downs due to damage/obsolescence (You've reduced its 'price')

  • A change in the Sales Mix - different items sell at different prices

  • New (different margin) products - have different prices and hence margins

  • New suppliers with different prices

  • Discounts offered - reducing the sales price

  • More or less Import duties - changing COS price

  • Exchange rate fluctuations

  • Change in cost classification: 

    eg. Some costs included as operating expenses now in cost of sales

NotesQuizObjective Test