Question 3.A.14: Show how the ROCE ratio for Alexis plc can be analysed into ...
Show how the ROCE ratio for Alexis plc can be analysed into the two elements for each of the years 2015 and 2016. What conclusions can you draw from your figures?
| ROCE | = | Operating profit margin |
× | Sales revenue to capital employed |
|
| 2015 | 34.7% | 10.8% | 3.20 | ||
| 2016 | 5.9% | 1.8% | 3.36 | ||
As we can see, the relationship between the three ratios holds for Alexis plc for both years. (The small apparent differences are simply because the three ratios are stated here only to one or two decimal places.)
In 2016, the business was more effective at generating sales revenue (sales revenue to capital employed ratio increased). However, it fell below the level needed to compensate for the sharp decline in the profitability of sales (operating profit margin). As a result, the 2016 ROCE was well below the 2015 value.
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