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OVERALL PROFITABILITY RATIO

Discuss OVERALL PROFITABILITY RATIO within the Financial Management forums, part of the PUBLISH / UPLOAD PROJECT OR DOWNLOAD REFERENCE PROJECT category; OVERALL PROFITABILITY RATIO This ratio is also called as “Return on Investments” (ROI) or “Return on Capital Employed” (ROCE). It ...

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OVERALL PROFITABILITY RATIO
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Abhijeet S
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OVERALL PROFITABILITY RATIO - September 23rd, 2010

OVERALL PROFITABILITY RATIO

This ratio is also called as “Return on Investments” (ROI) or “Return on Capital Employed” (ROCE). It indicates the percentage of return on the total capital employed in the business. This ratio measures the relationship between net profit before interest and tax and capital employed.


Objective: - The objective of computing this ratio is to find out how efficiently the long term funds supplied by the creditors and the shareholders have been used.


Formula:-

Overall profitability Ratio = Operating Profits x 100
Capital Employed

Here, Operating Profits means ‘Net Profit Before Interest and Tax’ and Capital Employed is derived from the formula, ‘Fixed Assets + Current Assets – Provision for Taxation’.



Precautions to be taken while calculating the Capital Employed

1. Though idle assets are excluded from capital employed, stand by plant and equipment essential to the normal running of a machinery should be excluded.


2. Intangible assets like goodwill, patents and trade marks are generally excluded, unless, they have potential sale value, because intangible assets should be written off as quickly as possible.


3. Where investments have been made outside the business, they are to be excluded, but, those made for the bonafide purposes of the business are included.


4. Fictitious assets like preliminary expenses, accounts of deferred revenue expenditure are excluded.


5. All stock – raw materials, work-in-progress and finished goods are included in capital employed by valuing them on a consistent basis, generally, at cost.


6. Normal trade debtors are included in the capital employed after taking into account provisions for doubtful debts


7. Any balance at bank in excess of the normal requirements of a business may be excluded.
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Business Education
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Re: OVERALL PROFITABILITY RATIO - June 11th, 2015

Hello Abhijeet, nice one but, i thought there was lacking some valuable information.So, i just decided to find out more on the given topic. Here is the link which comprises information in a systematic way and with more added information. It might help you, just one click to open it.
Profitability Ratios
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