Profitability – P

• It’s profitability, not profits, that matters most

• 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

• Notes:

  • 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

• Note – Luxury goods organisations will have very high operating margins on a much lower asset turnover than a supermarket