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It’s profitability, not profits, that matters most
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Profitability determines whether you have a good business or not, and whether the return those profits make on the capital invested is good enough
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The two main profitability measures are as follows
Return on Capital Employed (or Net Assets) – RoCE:
= RoCE (or RoNA) = Profits/ Sales x Sales/ CE = RoS x Asset turn
= 100/ 475 % = 21.1% say
N.B.
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Such a return would be good for most organisations in most sectors
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A high RoCE over 5 – 10 years indicates competitive strength, often based on enjoying high barriers to entry
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Return on Sales – RoS = Operating margins:
= RoS = Profits/ Sales = 100/ 1,000 = 10.0%
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N.B. Luxury goods organisations usually have very high operating margins but a much lower asset turnover than a supermarket