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Hi I’ve seen the below question and not sure how to tackle.
Co A and co b both have roce of 10 percent .A’s operating profit is
25 percent and b’s is 2 percent
Which of below is reasonable?
Co b has revalued equipment upwards?
Co a operates in market based on sale volumes?
Co A’s asset turnover is greater than b’s?Hi,
ROCE is made up of both the operating profit and net asset turnover.
If Co. A has a higher operating profit then Co. B must have the higher net asset turnover if they have the same ROCE.
Of the answers you put above then Co. B cannot have revalued its equipment upwards as this would give a higher capital employed and a lower net asset turnover. As mentioned above Co. A cannot have a higher asset turnover than Co. B as otherwise then Co. A’s ROCE would be higher than Co. B’s. If a company operates in a market based on sales volumes then it must be operating at the low cost and so low selling price end of the market, as in order to make profits the company must sell large volumes (think low cost airlines). It would therefore have small margins, so given Co. A’s higher operating margin it wouldn’t be in a market based on sales volume.
Thanks
Hi sir
Sorry having trouble understanding about asset turnover and how this is affected? I am ok with the sales volume part but can’t get to grips with the part where you mention co.b could not have revalued its equip upwards ,I understand the fact the capital employed would be higher but don’t understand how the asset turnover would be lower?
Hi sir also which of the 3 parts to the question would be the answer as it appears that non of them fit.?
If Co. B has revalued its assets to give a higher capital employed then the asset turnover is lower as it is measured as revenue over capital employed.
Sorry sir
Totally lost with this ? Roce is causing me issues and I do not follow
Any of the explanation, so out of the 3 which would be the answer?Also my understanding is Roce is profit before tax over equity and net debt, I am aware that the above example is realting to p&l but just
Don’t get which answer is correct and why?
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