Success Ratio Analysis & Example

8 May 2

List of success ratios and formulas:

1) Gross income ratio = (Gross profit / Net sales) * 100 Percent

2) Net income ratio = (Net income / Net sales) * 100 Percent

3) Operating income margin = Operating profit / Net sales

4) Return on Capital Employed = (Profit previous to interest / Capital employed) * 100 percent

5) ROE (Return on Equity) = Net profits / Average shareholder’s equity

6) ROA (Return on Assets) = Net income / Total assets

7) CFROI (Cash flow return on investment) = Cash flow / Market recapitalization

8) RAROC (Risk adjusted return on capital) = Predictable Return / Economic capital

9) Return on net assets = Net income / Net assets

Example:

Calculate the success ratios, given the following figures:

Stock at the start of the year: $10,000

Stock at the end of the year: $6,000

Sales: $18,000

Sales returns: $3,000

Buys: $2,000

Overhead expenses: $3,000

Capital at start of year: $17,000

Capital at end of year: $15,000

Solution:

Net sales = $18,000 – $3,000 = $15,000

Cost of sales = Stock at start + Purchases – Stock at finish = 10,000 + 2,000 – 6,000 = $6,000

Gross income = Net sales – Cost of sales = $15,000 – $6,000 = $9,000

Gross income ratio = (9,000 / 15,000) * 100 percent = 60 percent

Net income = Gross income – overhead expenses = 9,000 – 3,000 = $6,000

Net income ratio = (6,000 / 15,000) * 100% = 40 percent

Average capital employed = 1/2 (Capital of start + Capital at the end) = 1/2 (17,000+15,000) = $16,000

ROCE = (6,000 / 16,000) * 100% = 37.5 percent

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