* robots

Subject: Accounting and Finance

Title : Profitability Ratios

Ratios to examine profitability

The fundamental profitability ratio is Return on Capital Employed (ROC)

Without an intimate knowledge of the company it is not possible to say for certain whether these figures do represent a developing problem within the company. The company may have been forced to increase sales by lowering price.

This could happen as a result of aggressive competition, and would reduce profit margins. If there is an internal problem, then without looking further at the Balance Sheet, it would not be possible to identify the actual source of inefficiency, but some kind of inefficiency seems to be creeping into the company’s production system.

The expansion of the company in terms of sales may be introducing diseconomies of scale. The administration may be overexpanding and bureaucratic procedures introduced. Alternatively, the company may not be investing in long term capital items at all, and may be building up unnecessary piles of stocks.

Further analysis of liquidity would be required to discover the cause.
Full document available from Blacksacademy

Permalink - static URL
Page 1 of 1 pages