BUSF_A01.qxd

Ratio analysis

Operating profit margin ratio

×100%

The ratio for Jackson plc for 2008 is:

× 100 =16.1%

This ratio shows what is left of sales revenue after all of the expenses of running the

business for the period have been met. Once again it should be as large as possible,

provided that high profit margins are not being earned at the expense of some other

aspect. Again a ‘short-termist’ attitude to profit could lead to an apparently impressive

operating profit margin, but one that may not be sustainable into the future.

Activity ratios

Activity ratios are used to try to assess the effectiveness of a business in using its assets.

Sales revenue to capital employed (or net asset turnover) ratio

The ratio for Jackson plc for 2008 is:

=1.18 times

This ratio enables a judgement to be made on the extent to which the business has

generated revenue. As in the ROCE ratio, the capital employed figure (which is equal

in value to the net assets figure) is used as a measure of the size of the business. This

ratio is a measure of the effectiveness with which assets are being used to generate

sales. The size of this ratio will be a reflection of the business’s strategy on margins and

turnover, discussed above in the context of the gross profit margin ratio. A high ratio

is not necessarily beneficial if margins are so small that an unsatisfactory level of profit

for the year is generated.

It is worth noting the direct relationship between

l ROCE;

l operating profit margin; and

l sales revenue to capital employed.

If you look back at the definition of each of these ratios you will see that

ROCE =Operating profit margin ×Sales revenue to capital employed

837

709

Sales revenue

Share capital +reserves +non-current liabilities

135

837

Operating profit

Sales revenue