Return to Financial outcomes

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 is good enough

  • 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


    • Such a return would be good for most organisations in most sectors

    • A high RoCE over 5 – 10 years indicates competitive strength, often based on enjoying high barriers to entry        


           Return on Sales – RoS = Operating margins:

               =   RoS   =   Profits/ Sales   =   100/ 1,000   =   10.0%

  • N.B.  Luxury goods organisations usually have very high operating margins but a much lower asset turnover than a supermarket



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