The Profitability is measured on (a) Return on capital employed, (b) Return on share
holders funds (SHF) as indicated in the formulae given below:
Return on Capital EmployedPBT + Interest on fixed liabilities
= --------------------------------------- X 100
Capital employed
Return on SHF
NPAT
= ---------------------- X 100
SHF
Capital employed
Capital employed means
Total Assets - Current LiabilitiesCapital employed is nothing but SHF + long term liabilities.
To read the balance sheet it is necessary to utilise the auditor’s certificate and notes to the
financial statements.
Limitations
The data available in a balance sheet will not be sufficient to value the company as a
going concern. Because it is concerned only with things that can be expressed in
monetary terms. The other limitation is that figures that appear in the balance sheet are
only estimates and not scientific facts. The technical competency of staff, technological
advancement, market conditions etc., will have its own effects on business environment.
These aspects are not revealed in the balance sheet.