Business – 10.2 Analysis of published accounts – Profitability ratios | e-Consult
10.2 Analysis of published accounts – Profitability ratios (1 questions)
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Answer 2:
- A higher ROCE indicates that a company generates more profit per pound of capital employed.
- Company B’s ROCE of 18% suggests it is more efficient at turning its capital into operating profit than Company A’s 12%.
- Possible reasons for the difference include:
- Better asset utilisation by Company B.
- Higher operating margins (PBIT) relative to its capital base.
- More effective cost control or pricing power.
- However, interpretation must consider:
- Differences in capital structure – a company with lower debt may have a lower capital base, inflating ROCE.
- Industry norms – if the sector average is around 15%, Company A may be under‑performing while Company B is above average.
- One‑off items that could distort PBIT.
- Overall, all else equal, investors would view Company B as a more attractive investment based on its superior ROCE.