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