DFS - Asset turnover ratio

Sally

Just when i thought DFS was making sense i keep finding little things that are totally confusing me -

Osborne books give Asset Turnover ratio as revenue/net assets - AAT Dec 06 used revenue/capital employed although they did state 'based on Capital Employed'. Do AAT always use capital employed for this ratio or has this ratio changed since Dec 06? These little things are enough to throw me when i am struggling to retain all this information.

Have also noticed Osborne books give definitions on how to calculate Net Profit Ratio AND Operating Profit Ratio but AAT use Operating Profit TO CALCULATE Net profit

The more i revise....... the less i feel i know and understand!!!

marveljoe

Asset Turnover ratio I learned to work it as this Revenue / Capital Employed (Equity + Non-Current Assets)
Which shows you the asset turnover from money invested

Net profit / Renenue * 100, the net profit in the exams is shown as profit from operations (but I always look for profit before the interest and tax is deducted)

Sally

Thanks for response - isnt Capital Employed - Equity + long term debt?

A-Vic

well ROCE is LTD/E i think

swirlywirly

A-Vic - ROCE is profit from ops/capital employed - to work out how much profit is generated per £1 of capital employed in the business. The ratio you just quoted is the gearing ratio - how much long term debt the company has in relation to its equity.

As for the asset turnover, I noticed the same thing! I always thought it was revenue/net assets (NCA + CA - CL), but I suppose if the exam specifies that you use capital employed, you'd just have to do what it says... even if it doesn't make sense?? I hope that ratio isn't in there now

Sally - I also thought capital employed was equity + long term debts. Hopefully marveljoe will come back and weigh in on that!!

Sally

Hi AVIC - i'm not sure that's right

Return on Capital Employed (ROCE) is Operating Profit/Capital Employed .....and Capital Employed as i understand it is Equity + Long term debts

At least i think it is... i'm doubting everything i say now!?!?!

Cyfarthfa

Hi Sally,

I've been taught that ROCE is Op Profit/Capital employed (with capital employed being equity + long term debt)

RONA is then Op Profit/Net assets (which is the equity figure)

and then for Asset turnover you can use either Turnover/Capital employed or turnover/net assets. You can do both calculations if you want.

A-Vic

ROCE – Net profit/Total Assets

Ratio shows in percentage terms how much profit is being generated by the capital employed in the company.

Lower/Higer capital employed affects profit per £ of capital employed in the business.

Cyfarthfa

Hi A-VIC,

The formula you have just quoted is RONA and not ROCE. Don't want to confuse things but thought i'd point this out so people don't learn that formula as ROCE.

Sally

Thanks Cyfartha

That is the same as we have been taught (thought i was losing my mind!!)

However.......i have never,ever heard of RONA - where has that cropped up from??

Has it been tested in DFS exams in the past

Cyfarthfa

Hi Sally,

It's Return on net assets. Yep it's been taught in DFS, although i'm revising MAC at the mo as well so perhaps it's MAC I need this one and not DFS. So many thing's to remember!

Effectively, it's the same as ROCE but you don't include the long term debt. Therefore you see the return on just the equity (net assets)

In some of the questions I have noticed that there is no long-term debt so therefore the RONA and ROCE would be the same. I've noticed that the questions usually state either return on capital employed or net assets so it's just a case of remember that it is the operating profit divided by which ever one they ask for.

Sally

Thanks again - am studying MAC after Dec exams anyway so have added it to my notes.

A-Vic

http://www.aat.org.uk/servlet/file/DFS-modelanswers.pdf?ITEM_ENT_ID=64898&COLLSPEC_ENT_ID=1327

See now am confused myself suggested answer on ROCE above exam answer is PBTI(net profit before tax and interest)/Capital employed

Sandy or steve could you confirm this

CelticStar

I'm a bit confused about this as well. I'm studying MAC and I understood RONA to be:
Operating Profit/Net Assets (Fixed Assets + Current Assets - Current Liabilities). But in one of the exams I've just done - December 2007 - they use Net Assets (which is, in this question Total Assets Less Total Liabilities!!!!) divided by NET Profit. This is just really confusing. Can someone confirm what the correct RONA Ratio is for MAC please?

Also, in DFS is Asset Turnover Ratio: Turnover (Sales) divided by Total Assets less Current Liabilities. Is this the same in MAC?

Thanks for any help.

SandyHood

DFS and MAC do have a slight difference, it shouldn't affect your mark if you show your workings.
The difference is the non-current liabilities or long-term borrowings

DFS tests ROCE (where capital employed is Total Assets less Current Liabilities)

MAC tests RONA (where net assets is Total Assets less Total Liabilities)

If you use them the other way round, the marker will be able to give you credit, so please don't get worked up about it. Instead think about what it shows about the business.

Cyfarthfa

Hi,

I've been taught RONA as profit before int and tax/net assets net assets is the total of the top half of the b/s therefore total assets less total liabilities. I find it easier to think of net assets being the total of the equity (bottom half of the b/s)

However, I looked at the paper you refer to and they've used the profit after interest. Mmh confusing. I did check all the other papers and there's no interest or tax included and the np figure has just been used. So that doesn't really answer your question but if you find out before tomoz let me know!

Sally

Hi Sandy

Thanks for your post....

I'm getting really confused here - Net assets = Equity doesnt it??

Isnt Capital employed Net Assets( or Equity) + long term loans (non current liabilities)?


I think i have 'over' revised !!.... i dont feel sure about anything anymore!

SandyHood

100% correct

CelticStar

Thanks for your help Sandy.