Financial Formula

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Profitability
1 Return on Shareholders Funds (ROSF) Ratio
Definition: The Return On Shareholders Funds (ROSF) ratio is a measure of the profit for the period which is available to the ordinary shareholders with the ordinary shareholders' stake in a business.

Formula:
Return On Shareholders Funds = ((Net profit after taxation & preference dividend) / (Ordinary share capital + Reserves)) * 100%

Example 1:
If the net income of PPC Ltd is $80,000 whereas shareholder's funds are $500,000. Then, the ROSF = (80,000 / 500,000) * 100% = 16%

Example 2:
Calculate the ROSF for Silvers plc, given the following data: Net profit before tax $200,000
Corporation tax $20,000
Ordinary shares $310,000
General reserve $40,000
Retained profits $50,000
10% Debentures $180,000

Solution:
Net profit after taxation = 200,000 - 20,000 = $180,000
Ordinary share capital plus reserves = 310,000 + 40,000 + 50,000 = $400,000 ROSF = (180,000 / 400,000) * 100% = 45%

2 Return on Capital Employed Calculation
The Return on Capital Employed (ROCE) is used as a measure of the net profit generated from the long-term capital invested in the firm. The ratio is expressed in percentage terms as follows:

ROCE = [(Net profit before interest and taxation) / (Share capital + reserves + long term loan)] *100%

Learn how to calculate ROCE with the following example:

COO Ltd has the following information:
$1 Ordinary Shares: $200,000
General reserve: $50,000
Retained profit: $30,000
10% Debentures $60,000
Gross profit: $120,000
Salaries: $25,000
Rates: $5,000
Insurance: $6,000
Heat and light: $4,000
Audit fees: $8,000
Depreciation of Furniture: $1,000
Interest payable: $500

Required: Calculate the ROCE for COO Ltd.

Solution:
Total expenses (excluding interest payable) = 25,000 + 5,000 + 6,000 + 4,000 + 8,000 + 1,000 = $49,000 Net profit before interest and taxation = Gross profit - Total expenses = 120,000 - 49,000 = $71,000 Capital and reserves = Ordinary Shares + General reserve + Retained profit = 200,000 + 50,000 + 30,000 = $280,000 ROCE = [ 71,000 / (280,000 + 60,000) ] * 100% =  20.88%

3 How to Calculate Net Profit Margin
The net profit margin (also called net profit percentage) can be calculated by dividing net profit after interests and taxes by sales revenue. The ratio is expressed in percentage terms:

Net Profit Margin = (Net profit before interest and taxation / Sales) * 100%

Learn how to calculate Net Profit Margin with the following example:

NBA plc has the following information for the year ended 31 December 2010: Sales: $500,000
Cost of sales: $200,000
Rates: $3,000
Salaries: $20,000
Insurance: $5,000
Heat and light: $4,500
Postage and telephone: $500
Depreciation of Fixtures and fittings: $2,000
Interest payable: $1,500

Required: Calculate the net profit percentage for NBA plc.

Solution:
Gross profit = 500,000 - 200,000 = $300,000
Total expenses (exclude interest payable) = 3,000 + 20,000 + 5,000 + 4,500 + 500 + 2,000 = $35,000 Net profit before interest and taxation = Gross profit - Total expenses = 300,000 - 35,000 = $265,000 Net Profit Margin = (265,000 / 500,000) * 100% = 53%

4 How to Calculate Gross Profit Margin
Gross profit margin can be calculated by dividing gross profit of the business by total sales revenue generated. The ratio is expressed as percentage and is as follows:

Gross Profit Margin = (Gross profit / Sales) * 100%

Learn how to calculate Gross Profit Margin with the following example:

James Ltd has the following data for the year ended 31 December 2010: Sales revenue $870,000
Returns inwards $70,000
Purchases $200,000
Returns outwards $60,000
Carriage inwards $20,000
Carriage outwards $38,000
Opening inventory $100,000
Closing inventory $80,000

Then,
Net sales = Sales revenue - Returns inwards  = 870,000 - 70,000 = $800,000 Net purchases = Total Purchases - Returns outwards = 200,000 - 60,000 = $140,000 Cost of Sales =...
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