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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 (RoCE) is good enough
- Return on Capital Employed (or Net Assets) – RoCE:
= RoCE (or RoNA) = Profits x Sales = RoS x Asset turn
Sales CE
= 100 % = 21.1%
475
- Good for most organisations in most sectors, normally
- A high RoCE over 5 – 10 years indicates competitive strength, usually based on high barriers to entry
- Return on Sales – RoS = Operating margins:
= RoS = Profits = 100 = 10.0%
Sales 1000
- Luxury goods organisations will have very high operating margins on a much lower asset turnover than a supermarket
