This final ratio is not a measure of liquidity but of profitability
and general performance.
Return on capital employed asks how successful the business has
been at making profit based on the money put in by the owners. It
is a percentage, like the gross and net profit margins, and as with
them, the higher it is the better.
The figures you need are net profit, which comes from the profit
and loss account, and capital. The figure used for capital is the
value of the money invested by the owners plus the retained profit
kept by the business.
Assume that Dagenham Duvets had a net profit
for the year of £1,300. That would mean that a business that
was sitting on £204,000 of owners' money produced a profit
of only £1,300. That's 0.6%.
If you were an owner or shareholder, you'd probably be a little
upset with that figure - you could have earned more by leaving your
money in a bank. 0.6% may not be bad in some situations - perhaps
the whole economy had a bad year, perhaps the business is looking
to grow in the long term, etc but it's not exactly a world record.
Again, the higher the value the better. It's useful to compare
the ROCE ratios of different companies if you are thinking about
buying shares - which company has the manager who is most likely
to turn your investment into profit (which will be your reward)?
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