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The Return on Total Assets Ratio (ROTA) has a similar meaning to ROCE and the method of calculating it is the same, too. Let's work on ROTA with the Carphone Warehouse's figures: Return on Total Assets (ROTA) = PBIT * 100 Total Assets Notice that we use a different profit figure for this ratio - we use profit before interest and tax this time. This is because we try to match the profit we use with the total assets that operating managers use. Accountants would say that interest payments and tax payments are separate from the ways in which the total assets are used. That is, if we are trying to measure the efficiency of our total assets, then take the profit that they have generated before interest and taxation. Interest and tax problems are the senior managers' concern, since they decide how much to borrow and therefore how much interest they ought to pay; senior managers decide on capital investment, too, and they have a big say in how much tax they pay fo...

First some basic Rate of Return equations: Return on Capital Employed (ROCE) = Profit for the Year * 100 Equity Shareholders' Funds Return on Total Assets (ROTA) = PBIT * 100 Total Assets The rate of return ratios are thought to be the most important ratios by some accountants and analysts. One reason why the rate of return ratios are so important is that they are the ratios that we use to tell if the managing director is doing their job properly. Source: http://www.bized.co.uk/

Here are the sales and profit data for the Carphone Warehouse, mobile communications company, for the latest two years. What we want to know is whether the Carphone Warehouse is a profitable company ... and how do we know? Following the Profit and Loss Account for the Carphone Warehouse, below is the profitability section of our ratio table and we have included the name of the ratio, the formula and the workings for the year ended 31 March 2001. Carphone Warehouse Consolidated Profit and Loss Account 31 March 2001 25 March 2000 for the year ended £'000 £'000 Turnover 1,110,678 697,720 Cost of sales -830,126 -505,738 Gross profit 280,552 191,982 Operating expenses -176,960 -129,359 Operating profit 66,016 41,389 Other costs/income -21,004 -16,089 Profit before interest and taxation 45,012 25,300 Net interest receivable (payable) 2,385 -196 Profit on ordinary activities before taxation 47,397 25,104 Tax on profit on ordinary activities -8,675 -8,831 Profit on o...

Here is part of the profit and loss account for Marks & Spencer for two years. Compare these results by calculating the ratios named below and discuss what you find. Gross profit margin Operating profit margin Consolidated profit and loss for the year Marks & Spencer plc 2002 2001 £m £m Turnover 8,135.4 8,075.7 Cost of sales -6,862.5 -7,154.3 Gross profit 1,272.9 921.4 Operating expenses -629.1 -480.9 Operating profit 643.8 440.5 Additional notes are available on advanced profitability or you can move on to the Rate of Return section. Profitability - Additional Question 2 J Sainsbury plc has published the following two years' worth of turnover and profit information. Calculate the following ratios and make comments on what you find. Gross profit margin Operating profit margin Net profit before interest and taxation margin Consolidated profit and loss account J Sainsbury plc for the year ended 30-Mar-02 30-Mar-01 £m £m Turnover 17,162 17,244 Cost...

Now that we know a bit about two profitability ratios, let's see how to use them. Here are parts of the profit and loss account for the Carphone Warehouse plc; we will use that information to calculate its gross and net profit margin. Carphone Warehouse Consolidated Profit and Loss Account for the year ended 31 March 2001 25 March 2000 £'000 £'000 Turnover 1,110,678 697,720 Cost of sales 830,126 505,738 Gross profit 280,552 191,982 Operating expenses 176,960 129,359 Operating profit 66,016 41,389 Other costs/income 6,555 -5,132 Profit before interest and taxation 45,012 25,300 Let's put these ratios in a table: Profitability Ratios for the Carphone Warehouse Ratio Name Ratio Formula 31 Mar 01 25 Mar 00 Profitability For the year ended 31 Mar 01 Gross Profit Margin 280,552 ÷ 1,110,678*100 25.26% Net Profit Margin 45,012 ÷ 1,110,678*100 4.05% Look and see where these figures and ratios came from: don't do anything else until you have agree...

First some basic profitability equations: Net Profit Margin = Net Profit * 100 = Profit before Interest and Taxation * 100 Turnover Turnover Remember: Net Profit = Gross Profit - Expenses Why do we have two versions of this ratio - one for net profit and the other for profit before interest and taxation? Well, in some cases, you will find they use the term net profit and in other cases, especially published accounts, they use profit before interest and taxation. They both mean the same: look back at the financial statements for Tesco where we compared different names for the same things. The net profit margin ratio tells us the amount of net profit per £1 of turnover a business has earned. That is, after taking account of the cost of sales, the administration costs, the selling and distributions costs and all other costs, the net profit is the profit that is left, out of which they will pay interest, tax, dividends and so on. Here are a few examples of the net ...

First some basic profitability equations: Gross Profit Margin = Gross Profit * 100 Turnover Remember: Turnover = Sales Gross Profit = Turnover - Cost of Sales The gross profit margin ratio tells us the profit a business makes on its cost of sales, or cost of goods sold. It is a very simple idea and it tells us how much gross profit per £1 of turnover our business is earning. Gross profit is the profit we earn before we take off any administration costs, selling costs and so on. So we should have a much higher gross profit margin than net profit margin. Here are a few examples of the gross profit margins from different businesses: Leisure & Hotels International Airline Manufacturer Retailer Discount Airline Refining Pizza Restaurants Accounting Software Gross profit 9.64% 5.62% 35.14% 11.41% 27.46% 11.99% 47.52% 89.55% See how the gross profit margins vary from business to business and from industry to industry. For example, the international airline has a gr...

Basic Profitability First some basic profitability equations: Gross Profit Margin = Gross Profit * 100 Turnover Operating Profit Margin = Operating Profit * 100 Turnover Net Profit Margin = Net Profit * 100 Turnover Retained Profit Margin = Retained Profit * 100 Turnover Profit Mark up = Profit * 100 Cost What are you going to do if someone asks you to tell them whether a business is profitable or not? Firstly, do you remember what profit is? Profit is the difference between turnover, or sales, and costs: that is, profit = turnover - costs One problem is that there are several ways of measuring profit: gross profit; net profit before and after taxation; and retained profit are just some of them. So, you didn't print out those Tesco accounts we showed you did you? Well, look back at them to remind yourself of all these names for profit A profit margin is one of the profit figures we just mentioned shown as a percentage of turnover. They always tell us...

On this page you should complete the table below (you can do this by printing it out). In the left hand column there is a list of interest groups one by one. Your job is to complete the right hand column by giving two or three examples of ratios they might be interested in. We have given an example of each to help you get started. When you've filled in the gaps you will appreciate that it gives us some ideas about the ratios that each of the users we have identified would be interested in looking at. Interest Group Ratios to watch Investors Return on Capital Employed Lenders Gearing ratios Managers Profitability ratios Employees Return on Capital Employed Suppliers and other trade creditors Liquidity Customers Profitability Governments and their agencies Profitability Local Community This could be a long and interesting list Financial analysts Possibly all ratios Environmental groups Expenditure on anti-pollution measures Researchers Depends on the natur...

Financial ratio analysis is a fascinating topic to study because it can teach us so much about accounts and businesses. When we use ratio analysis we can work out how profitable a business is, we can tell if it has enough money to pay its bills and we can even tell whether its shareholders should be happy! Ratio analysis can also help us to check whether a business is doing better this year than it was last year; and it can tell us if our business is doing better or worse than other businesses doing and selling the same things. In addition to ratio analysis being part of an accounting and business studies syllabus, it is a very useful thing to know anyway! The overall layout of this section is as follows: We will begin by asking the question, What do we want ratio analysis to tell us? Then, what will we try to do with it? This is the most important question, funnily enough! The answer to that question then means we need to make a list of all of the ratios we might use: we will ...

Financial Ratio analysis is a fascinating topic. To help you through this extensive resource we have broken it down into several sections and sub-sections. You may move between sections using the navigation in the left hand bar, move between each page in turn by following the links at the bottom of each page or jump to a topic using the list below: Welcome Ratio Analysis 1: Profitability Ratio Analysis 2: Rate of Return Ratio Analysis 3: Working Capital Management 1: Liquidity Ratio Analysis 4: Working Capital Management 1 continued: Asset usage Ratio Analysis 5: Working Capital Management 2: Stock/debtors/creditors Ratio Analysis 6: Gearing Ratio Analysis 7: Investor Section Map Financial Ratios Database These ratio analysis materials were prepared for Biz/ed by Duncan Williamson: Duncan is a teacher, a freelance author and business consultant who prepares teaching/learning materials for accountants and students of accounting. Duncan maintains his own Web site at http://www.dunc...