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Return on capital employed Essay

Words: 638, Paragraphs: 7, Pages: 3

Paper type: Essay

This is referred to as the primary ratio and is one of the most important ratios. It measures the efficiency of funds invested in Bellway PLC at generating profits. All businesses raise capital in different ways, so this ratio can be expressed in different ways. As Bellway PLC is a limited company I have had to use the ROCE, which includes the net profit before tax and interest. Bellway PLC in 2003 had 56% ROCE and in 2004 increased to 66%.

This means Bellway PLC had a better and received a greater return in 2004. As it is an increase from 2003, this shows a positive sign to the efficiency for Bellway PLC. This ratio is important to the owner of Bellway PLC as it is the measure by which they determine whether their business is a better investment than other possible alternatives. The owners can use this ratio to compare the performance of Bellway PLC against possible returns to be made if their capital is invested elsewhere.

Gross Profit Margin This shows the relationship between gross profit and turnover (sales), showing how effective Bellway PLC is at trading. Bellway PLC have a high gross profit margin, in 2003 it was 23% and 2004 it went up to 24% so its efficiency in trading has a slight increase, which is still a positive result because the return is very good anyway. The gross profit is relatively easy to control as long as Bellway PLC knows how much it pays for its materials, etc it sells.

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The high gross profit margin is anticipated because Bellway PLC use local merchants and traders in all of there regional establishments. Owners and managers look at this ratio, so unlike the current ratio and some others, it doesn’t disadvantage the Bellway PLC chances to borrow money, etc. The owners of Bellway PLC can use this ratio to see how well the main activities of Bellway PLC are performing against its competitors, like Higgins. Net Profit Margin Net profit is considered against turnover (sale). In 2003 it was 18% and increased to 20% in 2004.

This is a low increase again, but the margin is still relatively high so this is a positive result, showing good stability in controlling its expenses. Net profit margin is harder to control than gross profit margin. This is clearly because any one of the overheads and expenses categories can affect the net profit figure. In Bellway PLC case the net profit margin has a slight increase, relative to the increase in gross profit margin. Net profit is used by owners and managers and is of prime importance in determining the performance as a whole for Bellway PLC.

ROOE (return on owners equity) In 2003 its 126% and increased to 152% in 2004. This is also an important ratio as it also measures the efficiency of Bellway PLC but in a different way. This ratio measures the return on the owner’s equity. So the owner’s return has increased by 26%, to 152% which is very good for the ROOE. This show the owners are making money after tax and interest has been paid. This is a higher return. GEARING RATIO Gearing Gearing went up in 2003 by 0. 01 to 0. 56.

This is not a very significant increase considering the positive increases in profitability ratio, although this could be explained by the fact that Bellway PLC has used finances to increase their stock (known as land bank). This increase can be found on the balance sheet of the annual report of Bellway PLC. This is an important ratio, as managers must consider gearing when making financing decisions. The relationship between the amount financed by the owners of Bellway PLC and the amount contributed by outsiders has an important effect on the degree of risk associated with Bellway PLC.

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This paper example is written by Benjamin, a student from St. Ambrose University with a major in Management. All the content of this paper consists of his personal thoughts on Return on capital employed and his way of presenting arguments and should be used only as a possible source of ideas and arguments.

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