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Finance assignment Tesco
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Understand the relevance of indicators relating to
Calculate the financial indicators relating to the above
Know the importance of these indicators in the assessment of
Understand the use and limitations of Ratio Analysis
This lesson introduces the most common accounting ratios grouped into four categories used by businesses as indicators of financial performance. These are:
2 Solvency and financial strength
4 Investment potential and growth
You should refer at your own convenience to the essential reading given above to develop further your theoretical understanding.
RETURN ON CAPITAL EMPLOYED (ROCE) - often referred to as the `Primary Accounting ratio' usually calculated as
ROCE OPERATING PROFIT (Before Interest & Tax) %
Indicates the overall profitability of a business.
Care must be taken in the selection of the profit figure to be used (profit before or after deduction of interest and tax) and of the amount to be taken as capital employed.
It is essential to compare like with like, and therefore if operating profit BEFORE interest and tax is used, then all interest bearing liabilities would be included in the figure for capital employed. Capital employed is defined as SHAREHOLDERS EQUITY + LONG TERM LOANS.
Variations of return on capital employed can be supplied for specific purposes. If the return to shareholders is required, the profit available for distribution should be used;
RETURN ON INVESTMENT NET PROFIT (AFTER INTEREST & TAX) %
(SHAREHOLDERS) SHAREHOLDERS FUNDS
This primary ratio is often sub-divided into secondary ratios.
(a) CAPITAL TURNOVER RATIO SALES %
This indicates the efficiency of utilisation of assets in generating revenue. Capital employed in this case referring to total assets employed by the organisation.
A low asset turnover indicates that the organisation is not generating sufficient volume of business for the size of the asset investment.
This may be remedied by either increasing sales or reducing assets or both.
(b) PROFIT MARGIN OPERATING PROFIT (BEFORE INTEREST & TAX) %
Indicates the relative efficiency of a business after all revenues and expenses have been considered.
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