1. Learning area 9 Chapter 12 Lecture 3

2. 7. Profitability ratios page 32 7.1 Return on capital employed (ROCE) 7.2 Profit margin 7.3 Asset utilisation ratio

3. 7.1 Return on capital employed page 32 Measures the relationship between the amount invested in the business and the returns generated for investors Referred to as return on investment / primary ratio Return on capital employed by shareholders and lenders: = PBIT share capital + reserves + long-term debt OR Return on capital employed by shareholders: = net profit before tax share capital + reserves

4. 7.1 Return on capital employed (continue..) Cover-up: ROCE (on shareholders funds and lenders (debt)): = 35 000 (70 000 + 100 000) = 20.6% ROCE (on shareholders funds): = 25 050 70 000 = 35.8%

5. 7.1 Return on capital employed page 33 Why calculate ROCE? Compare possible investments Compare to the cost of borrowing Skip ‘Variations’ p34

6. 7.1 Return on capital employed page 35 ROCE = asset utilisation x net profit margin = Revenue x PBIT Share capital + reserves + long-term debt Revenue = PBIT share capital + reserves + long-term debt Reserves = other reserves + retained earnings!!!!! Retained earnings forms part of distributable reserves – which dividends are paid out of!!!!!

7. 7.2 Profit margins page 36 Gross profit margin = Gross profit Sales Affected by: Sales, Cost of sales Operating profit margin = Operating profit Sales Affected by: Sales, Admin expenses, Distribution expenses, other expenses Net profit margin = Net profit (PBIT) Sales Affected by: All of the above and interest income = net profit before interest paid and tax

8. 7.2 Profit margins page 36 Reasons for fluctuations: Changes in the market for the product (affect sales) Marketing/ advertisements Poor management / excessive costs Abnormal costs

9. 7.2 Profit margins (continue..) Cover-up Ltd: Operating profit margin: = 33 000 250 000 = 13.2% Compare to… Net profit margin: = 35 000 250 000 =14%

10. 7.3 Asset utilisation ratio page 37 = revenue share capital + reserves + long-term debt Measures how well a company’s assets was used to generate revenue Cover-up Ltd: = 250 000 (70 000 + 100 000) = 1.47 = 147%