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Hi, can you please help me with this question
How can ROCE be further analysed into its component ratios?
Net profit margin*net asset turnover
OR
Net profit margin/net asset turnoverMargin x asset turnover
(Profit / revenue) x (Revenue / net assets)
(Remember that net assets = capital employed)
So, by cancellation, we arrive at Profit / Capital employed
Ok?
Biggles, you are correct – but please restrict your input to the general forum in future
Thanks
Thank you Sir, it is a question from f7 bpp kit and the answer there, is NP margin/ net asset turnover, which is probably wrong. That’s what got me confused. Thanks once again.
What you have just written is the same as Biggles’ reply! And I agreed with Biggles’reply!!!!
Return on capital employed? Another way of describing “return” is to call it “profit margin”
Another description for “capital employed” is “net assets” so “asset / turnover” relates net assets to revenue
And “return on capital employed” then becomes:
“Net profit (pbit) / revenue” (that’s the profit margin bit)
multiplied by
“Revenue / net assets” (that’s the asset turnover bit)
Revenue cancels out and leaves:
Net profit (pbit) / net assets and that, literally, is “return” on “capital employed”
Ok?
Hi, hopefully someone still reads this thread. My question is about the further breakdown of asset turnover. My kaplan text book says it can be further broken down, but it’s says it breaks down as revenue/non current assets and revenue/net working capital. For the life of me I can’t reconcile these two ratios back to the asset turnover ratio. I assume I am fundamentally misunderstanding something….
Thanks for any help
WillThese two sub-ratios are related only by the fact that they both use “revenue” as the numerator
So we can’t add these two to arrive at the same figure as asset/turnover, nor multiply nor divide them
Use some made up figures … let’s say that revenue is 100 and capital employed is 80
And capital employed is represented by non-current assets of 60 and net current assets of 20
So asset turnover is 100/80 = 1.25 (revenue / total net assets)
And revenue / non-current assets is 100/ 60 = 1.33 whereas
revenue / net current assets is 100/20 = 5
Can you see that there’s no combination of 1.33 and 5 to arrive back at 1.25?
OK?
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