Coffee Class 11

Topic 1. Profitability

Return on Capital Employed

This is a measure of management’s overall efficiency in using the finance/assets

ROCE = PBIT (Operating Profit) / Capital Employed

Capital Employed = Equity + LT Liability

or

Capital Employed = Total Assets - Current Liability

Q1. Illustration 1

I/S SFP

Sales 1,000 NCA 1,100

COS (300) CA 900

Expenses (200) Equity:

PBIT 500 SC 200

Interest (100) Reserve 800

Tax (100) Liabilities

Profit after tax 300 Current Liability 300

LT Liability 700

Required:

a) Calculate ROCE Using Capital Employed based on Equity and LT Liability

b) Calculate ROCE Using Capital Employed based on Total Assets less CL

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Q2. Illustration 2

I/S SFP

Sales 1,000 NCA 1,200

COS (300) CA 1,000

Expenses (100) Equity:

PBIT 600 SC 400

Interest (100) Reserve 800

Tax (100) Liabilities

Profit after tax 400 Current Liability 400

LT Liability 600

Required:

a) Calculate ROCE Using Capital Employed based on Equity and LT Liability

b) Calculate ROCE Using Capital Employed based on Total Assets less CL

ROCE is affected by:

1) the carrying amount of PPE

So old plant will give a higher than usual ROCE


2) Revaluations upwards will give a lower than usual ROCE

ROCE can be broken down 2 more ratios:

ROCE = Operating Margin x Asset Turnover

Operating Profit = Operating Profit (PBIT) / Sales

Asset Turnover = Sales/Capital Employed

The asset turnover indicates how well the assets of a business are being used to generate sales or
how effectively management have utilised the total investment in generating income.

So if operating margin goes up and ROCE goes down - you know that ROCE is going down due to
a poor Net asset turnover.

The assets aren't producing the amount of sales they used to.

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Q3. Illustration 3

I/S SFP

Sales 1,000 NCA 1,100

COS (300) CA 900

Expenses (200) Equity:

PBIT 500 SC 200

Interest (100) Reserve 800

Tax (100) Liabilities

Profit after tax 300 Current Liability 300

LT Liability 700

Required:

Calculate ROCE Using Gross margin and Asset Turnover

Q4. Illustration 4

I/S SFP

Sales 1,000 NCA 1,200

COS (300) CA 1,000

Expenses (100) Equity:

PBIT 600 SC 400

Interest (100) Reserve 800

Tax (100) Liabilities

Profit after tax 400 Current Liability 400

LT Liability 600

Required:

Calculate ROCE Using Gross margin and Asset Turnover

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Return on Equity

This is what the shareholders will get, (what is distributable to them)

ROE = PAT / Equity

Q5. Illustration 5

I/S SFP

Sales 1,000 NCA 1,100

COS (300) CA 900

Expenses (200) Equity:

PBIT 500 SC 200

Interest (100) Reserve 800

Tax (100) Liabilities

Profit after tax 300 Current Liability 300

LT Liability 700

Required:

Calculate ROE.

Q6. Illustration 6

I/S SFP

Sales 1,000 NCA 1,200

COS (300) CA 1,000

Expenses (100) Equity:

PBIT 600 SC 400

Interest (100) Reserve 800

Tax (100) Liabilities

Profit after tax 400 Current Liability 400

LT Liability 600

Required:

Calculate ROE.
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Margins

Gross Profit Margin = Gross Profit / Sales

Operating Profit Margin = Operating Profit (PBIT) / Sales
Net Profit Margin = Net Profit (PAT) / Sales

Q7. Illustration 7

I/S SFP

Sales 1,000 NCA 1,100

COS (300) CA 900

Expenses (200) Equity:

PBIT 500 SC 200

Interest (100) Reserve 800

Tax (100) Liabilities

Profit after tax 300 Current Liability 300

LT Liability 700

Required:

Calculate Gross Profit Margin, Operating Profit Margin, Net Profit Margin.

Q8. Illustration 8

I/S SFP

Sales 1,000 NCA 1,200

COS (200) CA 1,000

Expenses (100) Equity:

PBIT 700 SC 400

Interest (100) Reserve 800

Tax (100) Liabilities

Profit after tax 500 Current Liability 400

LT Liability 600

Required:

Calculate Gross Profit Margin, Operating Profit Margin, Net Profit Margin.
Page 5 of 9
Topic 2. Gearing Ratios

D/E Ratio

D/E ratio = D/ E

or

D/E ratio = D / (D + E)

It looks at the Financial Risk - it is a risk of having too much debt.

We are worried whether we will be able to pay the capital and the interest of the debt.

Q1. Illustration 1

SFP

NCA 1,500

CA 900

Equity:

SC 200

Reserve 800

RE 400

Liabilities

Current Liability 300

LT Liability 700

Required:

Calculate D/E ratio.

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Interest Cover

Interest Cover = PBIT / Interest

Q2. Illustration 2

I/S SFP

Sales 1,000 NCA 1,200

COS (200) CA 1,000

Expenses (100) Equity:

PBIT 700 SC 400

Interest (100) Reserve 800

Tax (100) Liabilities

Profit after tax 500 Current Liability 400

LT Liability 600

Required:

Calculate D/E Ratio and the Interest Cover.

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Topic 3. Liquidity

Current ratio

Current ratio = Current Assets / Current Liabilities

Quick ratio

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

Working Capital Cycle

Inventory Days + Receivable days - Payable days

Inventory days = (Inventory / COS) x 365

Receivable days = (Receivables / Credit Sales) x 365

Payable days = (Payables / Credit Purchases) x 365

Q1. Illustration 1

I/S SFP

Sales 10,000 NCA 1,100

COS (3,000) Inventory 500

Gross Profit 7,000 Receivables 400

Expenses (2,000) Equity:

PBIT 5,000 SC 200

Interest (1,000) Reserve 800

Tax (1,000) Liabilities

Payables 200

Profit after tax 3,000 Other Current 100

Liability

LT Liability 700

Required:

Calculate Current Ratios, Quick Ratios, Inventory Days, Receivable days and Payable days.

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Q2. Illustration 2

I/S SFP

Sales 12,000 NCA 1,100

COS (5,000) Inventory 300

Gross Profit 7,000 Receivables 600

Expenses (2,000) Equity:

PBIT 5,000 SC 100

Interest (1,000) Reserve 800

Tax (1,000) Liabilities

Payables 300

Profit after tax 3,000 Other Current 100

Liability

LT Liability 700

Required:

Calculate Current Ratios, Quick Ratios, Inventory Days, Receivable days, Payable days and Work
capital cycle.

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