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Profit before taxation x 100
Fixed Assets (FA) + Current Assets (CA) – Current Liabilities
Benchmark: 20%
Profit before taxation as a percentage of the capital tied up in the business i.e. the company’s profitability.
The higher the ratio, the more profitable the company. Relate this to net margin and capital turnover.
The percentage return must be compared with alternative investment opportunities, such as returns offered on bank accounts.
If investment in the bank can yield a guaranteed 7 per cent plus (depending on interest rates at the time), a company should show a return of around 20 per cent in order to justify using those funds at a higher level of risk.
