Simple Tools and Techniques for Enterprise Risk Management, Second Edition
by Robert J. Chapman
Copyright © 2011, John Wiley & Sons, Ltd.
This appendix should be read in conjunction with Section 8.7.1.
The following ratios may be used to evaluate the proﬁtability of a business.
Return on Ordinary Shareholders’ Funds
The return on ordinary shareholders’ funds (ROSF) compares the amount of proﬁt for the
period available to the ordinary shareholders with the ordinary shareholders’ stake in the
business. The ratio, which is normally expressed in percentage terms, is given by
net proﬁt after taxation and preference dividend (if any)
ordinary share capital plus reserves
The net proﬁt after taxation and after any preference dividend is used in calculating the ratio
as this ﬁgure represents the amount of proﬁt available to the ordinary shareholders.
Return on Capital Employed
The return on capital employed (ROCE) is a fundamental measure of business performance.
The ratio expresses the relationship between the net proﬁt generated by the business and the
long-term capital invested in the business. The ratio is expressed in percentage terms as
net proﬁt before interest and taxation
share capital + reserves + long-term loans
It should be noted that the proﬁt ﬁgure used in the ratio is the net proﬁt before interest and
taxation. This ﬁgure is used because the ratio attempts to measure the returns to all suppliers
of long-term ﬁnance before any deductions for interest payable to lenders or payments of
dividends to shareholders are made. ROCE is considered by many to be a primary measure of
proﬁtability as it compares inputs (capital invested) with outputs (proﬁt). This comparison is
of vital importance in assessing the effectiveness with which funds have been deployed.
Net Proﬁt Margin
The net proﬁt margin relates the net proﬁt for the period to the sales during...