WEILAI Online Academic assistant
WEILAI Online Academic assistant
Back to 课程

Business_A-level_Cie

0% Complete
0/0 Steps

  1. business-and-its-environment

    enterprise
    6 主题
  2. business-structure
    6 主题
  3. size-of-business
    3 主题
  4. business-objectives
    3 主题
  5. stakeholders-in-a-business
    2 主题
  6. external-influences-on-business
    12 主题
  7. business-strategy
    10 主题
  8. human-resource-management
    human-resource-management-hrm
    8 主题
  9. motivation
    4 主题
  10. management
    2 主题
  11. organisational-structure
    5 主题
  12. business-communication
    5 主题
  13. leadership
    2 主题
  14. human-resource-strategy
    3 主题
  15. marketing
    the-nature-of-marketing
    7 主题
  16. market-research
    3 主题
  17. the-marketing-mix
    6 主题
  18. marketing-analysis
    5 主题
  19. marketing-strategy
    3 主题
  20. operations-management
    the-nature-of-operations
    3 主题
  21. inventory-management
    2 主题
  22. capacity-utilisation-and-outsourcing
    1 主题
  23. location-and-scale
    2 主题
  24. quality-management
    1 主题
  25. operations-strategy
    4 主题
  26. finance-and-accounting
    business-finance
    2 主题
  27. sources-of-finance
    3 主题
  28. forecasting-and-managing-cash-flows
    1 主题
  29. costs
    4 主题
  30. budgets
    1 主题
  31. financial-statements
    4 主题
  32. analysing-published-accounts
    6 主题
  33. investment-appraisal
    2 主题
课 Progress
0% Complete

The meaning and importance of profitability

  • Profitability is a measure of how effectively a business converts revenue into profit or how well capital invested in a business is used to generate profit

  • Profitability can be compared to previous years to better understand business performance

  • Higher and increasing profit margins are preferable

    • More revenue is being converted to profit

    • Capital invested is being used more effectively to generate profit

Why is profitability important?

  1. Profitability shows business success

    • It indicates whether a business is generating more income than it spends, which is a key measure of financial health

  2. Profits provide internal finance

    • Retained profit can be reinvested in the business, reducing the need for external borrowing

  3. Profitability attracts investors and lenders

    • A profitable business is more likely to secure funding, as it shows the business can generate returns and repay debts

Return on capital employed

  • The return on capital employed compares the profit made by a business to the amount of capital invested in the business

    • It is a measure how how effectively a business uses the capital invested in the business to generate profit

  • Return on capital employed is a key performance indicator that can be compared over time and also with competitors and other potential capital investments

  • Return on capital employed is expressed as a percentage and can be calculated using the formula

Return space on space capital space employed space equals space fraction numerator Profit space from space operations over denominator Capital space employed end fraction space space cross times space 100

  • Capital employed is calculated using the formula

Capital space employed space equals space Issued space shares space plus space Reserves space plus space Non minus current space liabilities

Worked Example

Faced with increasing costs, Kent & Medway Properties Ltd is looking to close one of its three high-street estate agency branches.

The table below shows some key data for each of the branches.

Branch

Capital Employed 

Operating Profit

Sevenoaks

£2.4m

£0.37m

Whitstable

£3.1m

£0.57m

Rochester

£2.9m

£0.51m

Calculate the return on capital employed (RoCE) for each branch and recommend which branch, on profitability terms, should close.

(5)

Step 1: Apply the formula to calculate the RoCE for each branch

<img alt=”Return space on space capital space employed space equals space fraction numerator Profit space from space operations over denominator Capital space employed end fraction space space cross times space 100 Sevenoaks space equals space fraction numerator £ 0.37 straight m over denominator £ 2.4 straight m end fraction space space cross times space 100 space equals space 15.42 percent sign Whitstable space equals space fraction numerator £ 0.57 straight m over denominator £ 3.1 straight m end fraction space space cross times space 100 space equals space 18.39 percent sign Rochester space equals space fraction numerator £ 0.51 straight m over denominator £ 2.9 straight m end fraction space space cross times space 100 space equals space 17.59 percent sign
” data-mathml=”<math style=”font-family:Arial” ><semantics><mstyle mathsize=”14px”><mi>Return</mi><mo>&#160;</mo><mi>on</mi><mo>&#160;</mo><mi>capital</mi><mo>&#160;</mo><mi>employed</mi><mo>&#160;</mo><mo>=</mo><mo>&#160;</mo><mfrac><mrow><mi>Profit</mi><mo>&#160;</mo><mi>from</mi><mo>&#160;</mo><mi>operations</mi></mrow><mrow><mi>Capital</mi><mo>&#160;</mo><mi>employed</mi></mrow></mfrac><mo>&#160;</mo><mo>&#160;</mo><mo>&#215;</mo><mo>&#160;</mo><mn>100</mn><mspace linebreak=”newline”/><mspace linebreak=”newline”/><mi>Sevenoaks</mi><mo>&#160;</mo><mo>=</mo><mo>&#160;</mo><mfrac><mrow><mo>&#163;</mo><mn>0</mn><mo>.</mo><mn>37</mn><mi mathvariant=”normal”>m</mi></mrow><mrow><mo>&#163;</mo><mn>2</mn><mo>.</mo><mn>4</mn><mi mathvariant=”normal”>m</mi></mrow></mfrac><mo>&#160;</mo><mo>&#160;</mo><mo>&#215;</mo><mo>&#160;</mo><mn>100</mn><mo>&#160;</mo><mo>=</mo><mo>&#160;</mo><mn>15</mn><mo>.</mo><mn>42</mn><mo>%</mo><mspace linebreak=”newline”/><mspace linebreak=”newline”/><mi>Whitstable</mi><mo>&#160;</mo><mo>=</mo><mo>&#160;</mo><mfrac><mrow><mo>&#163;</mo><mn>0</mn><mo>.</mo><mn>57</mn><mi mathvariant=”normal”>m</mi></mrow><mrow><mo>&#163;</mo><mn>3</mn><mo>.</mo><mn>1</mn><mi mathvariant=”normal”>m</mi></mrow></mfrac><mo>&#160;</mo><mo>&#160;</mo><mo>&#215;</mo><mo>&#160;</mo><mn>100</mn><mo>&#160;</mo><mo>=</mo><mo>&#160;</mo><mn>18</mn><mo>.</mo><mn>39</mn><mo>%</mo><mspace linebreak=”newline”/><mspace linebreak=”newline”/><mi>Rochester</mi><mo>&#160;</mo><mo>=</mo><mo>&#160;</mo><mfrac><mrow><mo>&#163;</mo><mn>0</mn><mo>.</mo><mn>51</mn><mi mathvariant=”normal”>m</mi></mrow><mrow><mo>&#163;</mo><mn>2</mn><mo>.</mo><mn>9</mn><mi mathvariant=”normal”>m</mi></mrow></mfrac><mo>&#160;</mo><mo>&#160;</mo><mo>&#215;</mo><mo>&#160;</mo><mn>100</mn><mo>&#160;</mo><mo>=</mo><mo>&#160;</mo><mn>17</mn><mo>.</mo><mn>59</mn><mo>%</mo><mspace linebreak=”newline”/></mstyle><annotation encoding=”application/vnd.wiris.mtweb-params+json”>{“fontFamily”:”Times New Roman”,”fontSize”:”18″,”autoformat”:true,”toolbar”:”<toolbar ref=’general’><tab ref=’general’><removeItem ref=’setColor’/><removeItem ref=’bold’/><removeItem ref=’italic’/><removeItem ref=’autoItalic’/><removeItem ref=’setUnicode’/><removeItem ref=’mtext’ /><removeItem ref=’rtl’/><removeItem ref=’forceLigature’/><removeItem ref=’setFontFamily’ /><removeItem ref=’setFontSize’/></tab></toolbar>”}</annotation></semantics></math>” height=”233″ role=”math” src=”data:image/svg+xml;charset=utf8,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20xmlns%3Awrs%3D%22http%3A%2F%2Fwww.wiris.com%2Fxml%2Fmathml-extension%22%20height%3D%22233%22%20width%3D%22386%22%20wrs%3Abaseline%3D%22116%22%3E%3C!–MathML%3A%20%3Cmath%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F1998%2FMath%2FMathML%22%20style%3D%22font-family%3AArial%22%3E%3Cmstyle%20mathsize%3D%2214px%22%3E%3Cmi%3EReturn%3C%2Fmi%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmi%3Eon%3C%2Fmi%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmi%3Ecapital%3C%2Fmi%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmi%3Eemployed%3C%2Fmi%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmo%3E%3D%3C%2Fmo%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmfrac%3E%3Cmrow%3E%3Cmi%3EProfit%3C%2Fmi%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmi%3Efrom%3C%2Fmi%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmi%3Eoperations%3C%2Fmi%3E%3C%2Fmrow%3E%3Cmrow%3E%3Cmi%3ECapital%3C%2Fmi%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmi%3Eemployed%3C%2Fmi%3E%3