Question 10.3: Alexis Ltd's ROCE can be analysed as shown below.
Alexis Ltd’s ROCE can be analysed as shown below.
| ROCE | = |
Operating profit margin |
× |
Sales revenue to capital employed |
|
| 2016 | 34.7% | = | 10.8% | × | 3.20 |
| 2017 | 5.9% | = | 1.8% | × | 3.36 |
Clearly, the main issue relates to the operating profit margin, rather than sales revenue to capital employed. The business was marginally more effective at generating sales revenue (i.e. the sales revenue to capital employed ratio increased) in 2017 than in 2016. However, in 2017 the operating profit margin fell substantially, with the result that ROCE also decline dramatically. Further analysis needed to examine just where the inefficiencies relating to operating costs arise.
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