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5. Which of the following statements is NOT correct?
A Return on capital employed can be defined as profit before interest and tax divided by the sum of shareholders’ funds and prior charge capital
B Return on capital employed is the product of net profit margin and net asset turnover
C Dividend yield can be defined as dividend per share divided by the ex-dividend share price
D Return on equity can be defined as profit before interest and tax divided by shareholders’ fundsI know the answer is D. But is B not also incorrect. ROCE is calculated on PBIT and not net margin; and is not based on net assets but rather Gross assets which will make B incorrect. I guess the examiner wanted to say ROE.
There is no error – statement B is correct.
In ratio analysis net profit always means net operating profit which is the profit before interest and tax.
The net profit margin is a measure of how well the business is being run (in profit terms) and interest and tax are irrelevant to looking at how well the managers are generating profits.Also, net assets in ratio analysis means total assets less current liabilities (which is always the same as the long-term finance – equity plus long-term debt).
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