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Analysing
Ratios
(part 1)

profitability ratios
liquidity ratios
efficiency ratios
gearing ratios
investor ratios
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Profitability Ratios
1. ROCE -
Profit before interest and tax
Capital Employed

shareholders' equity +
long-term debt
OR
total assets - current
liabilities
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Shows how much operating income is

generated for each dollar of capital
invested.

An increase in ROCE is generally

considered an improvement i.e. more
profit is earned per dollar of capital
invested.

Just calculating a company' s ROCE is

not enough, but a closer look at profit
margins and asset turnover should be
given as ROCE consists of these
components.

For example, an improvement in return

on invested capital
may be due to
improved profit
margins or more
efficient use of
assets.
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1. Gross profit margin -

2. Gross profit margin -
Gross profit
Revenue

variations in this ratio are due to changes in the

selling price/sales volume or changes in cost of
sales.

A decrease in gross profit margin does not

necessarily indicate poor business performance.
Comparisons should be made between
companies in the same industry, not across
industries, to get a true analysis.

For example, a service

company will have a high
gross margin because it
has lower production costs.
On the other hand,
automakers will have lower
ratios due to higher
production costs.
 1. Gross
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profit margin -
2. Gross profit margin -
3. Operating profit margin -
Operating profit/EBIT
Revenue

It analyses how efficiently a company

manages its expenses so as to maximize
profitability.

When interpreting operating profit margin, it

is advisable to link the result back to the
gross profit margin.

However if it can not be linked with gross

profit margin, it may
be due to good
indirect cost control
or perhaps there
could be a one-off
profit on disposal
distorting the
operating profit
figure.
 2. Gross profit margin -
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3. Operating profit margin -
4. Return on eqiuty (ROE) -
Profit after tax
Shareholder's funds
It measures the effectiveness of a company in
generating profits from its shareholder' s equity.

ROE provides insight into the profitability of a

company and the efficiency with which it uses
shareholder funds to generate profits.

It is important to compare ROE to the company' s

industry average and its historical performance, to
assess the sustainability and growth potential of
the company.

An increasing trend in ROE

over time is a positive sign,
indicating that the
company is performing
well and effectively using
its equity to generate
profits and is attractive to
investors and vice versa.