Term
Return on Capital Employed (ROCE)
What does ROCE measure?
Answer
Meaning
How efficiently capital invested is generating profit.
Interpretation: A high inventory turnover ratio means efficient inventory management; too high may risk stock shortages.
What does ROCE measure?
How efficiently capital invested is generating profit.
What is the formula for ROCE?
(Operating Profit ÷ Capital Employed) × 100
How is Capital Employed calculated?
Equity + Non-current liabilities
What does a high ROCE indicate?
Better use of funds to generate profits.
What does inventory turnover ratio show?
How quickly stock is sold and replaced.
What is the formula for inventory turnover?
Cost of sales ÷ Average inventory
What does a high inventory turnover imply?
Efficient inventory management but risk of stock shortages if too high.
What does trade receivable days measure?
Average time customers take to pay.
How is trade receivable days calculated?
(Trade Receivables ÷ Revenue) × 365 days
What could longer trade receivable days cause?
Cash flow problems.
What does trade payable days show?
Average time business takes to pay suppliers.
What is the formula for trade payable days?
(Trade Payables ÷ Cost of Sales) × 365 days
What are potential impacts of longer trade payable days?
Improves cash flow but risks supplier relationships.
What does the gearing ratio measure?
Proportion of debt compared to total capital.
What is the formula for gearing ratio?
(Non-current liabilities ÷ Capital Employed) × 100
What does a high gearing ratio indicate?
More debt financing, higher risk, potential for higher returns.
What does a low gearing ratio indicate?
Reliance on equity, lower financial risk, possibly less aggressive growth.