7.2d Ratios - ROCE

Question 1

Ratio analysis involves what?

Answer 1

The calculation and interpretation of key financial performance indicators to provide useful insights

Question 2

Ratios compare what?

Answer 2

Two sets of linked data

Question 3

What does ROCE stand for?

Answer 3

Return on capital employed

Question 4

What does ROCE measure?

Answer 4

The profitability of a business

Question 5

How does ROCE measure profitability of a business?

Answer 5

By calculating its operating profit a as a percentage of the capital

Question 6

ROCE formula

Answer 6

ROCE (%) = (operating profit ÷ capital employed) x 100

Question 7

Is a higher ROCE percentage better or worse?

Answer 7

Better

Question 8

Why is it bad for a business to have too high a profit margin?

Answer 8

• It can mean too high prices so lost customers

- It can attract competition to the industry

Question 9

High quality profit meaning

Answer 9

It is mainly from a recurring activity, not a one-off

Question 10

Disadvantages of ratios

Answer 10

• Figures are historic
• Says what not why
• Non-financial assets not included

Question 11

Ways to improve ROCE:

Answer 11

• Pay off debt to reduce non-current liabilities

- Making the business more efficient to increase operating profit

Question 12

Ways ratios can be used:

Answer 12

• Spot trends
• Compare against competitors
• Potential investors can decide whether to invest
• Help with decision making