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Accounting For Managers - Ratio Analysis

Analysis Of Operational Efficiency - Return on Investment | Financial operations ratio

   Posted On :  27.01.2018 10:27 pm

The operational efficiency of an organisation is its ability to utilise the available resources to the maximum extent. Success or failure of a business in the economic sense is judged in relation to expectations, returns on invested capital and objectives of the business concern.

There are many techniques available for evaluating financial as well as operational performance of a firm. The two important techniques adopted in this study are:

 

1.         Turnover to capital employed or return on investment (ROI)

 

2.         Financial operations ratio

 

Turnover To Capital Employed:

 

 

This is the ratio of operating revenue to capital employed. This is one of the important ratios to find out the efficiency with which the firms are utilising their capital. It signifies the number of times the total capital employed was turned into sales volumes. The term capital employed includes total assets minus current liabilities. The ratio for calculating turnover to capital employed (in percentage) is:

              Operating Revenue

 

Turnover To Capital Employed = --------------------------- X 100 Capital Employed

                                    The higher the ratio, the better is the position.

 

 

Financial Operations Ratio:

 

 

The efficiency of the financial management of a firm is calculated through financial operations ratio. This ratio is a calculating device of the cost and the return of financial charges. This ratio signifies a relationship between net profit after tax and operating profit. The formula for the computation of this ratio is:

 

 

                                          Net Profit After Tax

 

Financial Operations Ratio = --------------------------- X 100

                                       Operating Profit

 

Here, the term “operating profit” means sales minus operating expenses. A higher ratio indicates the better financial performance of the firm.

 

 

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