Strategic Marketing: Planning and Control, Third Edition

Return On Capital Employed (ROCE) is expressed as net profit as a per-

centage of capital. It examines to what extent an investment is paying off.

It can be applied to an entire business or to specific projects requiring cap-

ital investment. ROCE is used to indicate the extent to which an invest-

ment is justified or to compare investment opportunities.

282 Strategic Marketing: Planning and Control

Examples

Gross profit margin

Profit

Sal es revenue

 Profiit Revenue Cost

Netprofitmargin

Profit af





tter tax

Sales revenue

ROCE

Net profit

Capital



employed

Examples

Liquidity ratios

Ratios evaluate the ability to remain solvent and meet current liabilities.

The firm needs to be able to convert assets into cash in order to meet pay-

ment demands. If the current ratio is more than one, sufficient assets exist

to meet current liabilities. The quick (or acid test) ratio gives a stricter

appraisal of solvency as it assumes stock is not automatically convertible

into cash. Ideally, this ratio should be one to one. However, many busi-

nesses operate with lower acceptable ratios. If the ratio is too high it may

suggest that the organisation does not make optimal use of its financial

assets (e.g. holding too much cash).

Current ratio

Current assets

Current liabili



tties

Quick ratio

Current assets Inventory

C





uurrent liabilities

Debt ratios

These ratios help to determine the company’s ability to handle debt and

meet scheduled repayments. They examine the extent to which borrowed

funds finance business operations. If creditors begin to outweigh debtors

this may signify overtrading – unable to collect money owed.