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 (RoCE) is good enough

 

  • 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

  • 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/ Sales            =          100/ 1,000            =   10.0%

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

 

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