PBIT 20X8 20X7

$ $
Profit before tax 342 132 225102
Interest Payable(Note 2) 18 115 21 909
PBIT 360 245 247 011
ROCE: amount of funds(capital) that were employed in making
the profits
Capital Employed =20X8 1 870630 881731 =988 899
20X7 1 664425 912 456=751 96
20X8 20X7
$ $
ROCE 360245 247011
988899 751969
36.4% 32.8%
There has been increased in ROCE by about 10% or 11%. If for
example current interest rate is 8%, actual ROCE would not
seem low. In fact, it might seem high
Profit margin x Asset turnover =ROCE
PBIT x Sales =PBIT
Sales CE CE
Profit Margin Asset Turnover ROCE
20X8 360 245 3 095 576 360 245
3095576 988899 988899
11.64% 3.13times 36.4%
20X7 247 011 1 909051 247011
1909051 751969 751 969
12.94% 2.54times 32.8%
The companys improvement in ROCE between 20X7 and 20X8 is attributable to a
higher asset turnover. Indeed, the profit margin has fallen a little, but the higher
asset turnover has more than compensated this.
Debt ratio is the ratio of a companys total debt to its total
assets.
20X8 20X7
$ $
Total debts 881731+100000 912456 +100000
1870630 1664425
52% 61%
50% might regard as a safe limit., if the debt ratio is over 50% and getting
worse, the comp debt position will be worth looking at more carefully.
In this case, the debt ratio is quite high, mainly because of the large amount
of current liabilities. However,, the debt ratio has fallen from 61% to 52%
between 20X7 and 20X8, and so the company appears to be improving its
debt position.
Capital gearing or leverage is concerned with a companys long term capital
structure.
20X8 20X7
$ $
Gearing Ratio 100000 100000
988899 751969
10% 13%
Leverage 888899 651969
988899 751969
90% 87%
A comp with a gearing ratio of more than 50% is said to be high-geared. If it is
getting worse, it is likely to have difficulty in future when it wants to borrow
more and also the more highly geared the comp, the greater the risk that
little(if anything) will be available to distribute by the way of dividend to the
shareholders.
In this case(Furlong), although the comp have a high debt ratio, have a low
gearing.
Interest cover ratio shows whether a comp is earning enough PBIT to pay its
interests confortably.
20X8 20X7
$ $
Interest Cover 360245 247011
18115 21909
20 times 11 times
Furlong has more than sufficient interest cover. In view of the comp low
gearing, this is not surprising and so we finally obtain a picture of Furlong as a
comp that does not seem to have a debt problem in spite of its high(although
declining) debt ratio.