Using ratios to analyse companies

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7. Sales as a multiple of capital employed

Definition: Sales (or turnover) divided by capital employed

Example

Yardstick:

The appropriate level depends on profit margins. If margins are high a figure of 1 to 2 is acceptable, but not if margins are low. If the figure is unusually low, it suggests that the low ROCE stems from insufficient volume rather than excessive costs. The remedy is to increase volume or reduce capital employed, preferably by getting rid of divisions that don't earn their keep.

1. Why bother with ratios? 2. A word of warning 3. The P&L and the balance sheet 4. Grouping the ratios 5. Profit margin 6. Return on capital employed (ROCE) 7. Sales as a multiple of capital employed 8. Stockturn 9. Debt collection 10. Payment of trade creditors 11. Cash-to-cash cycle 12. Gearing 13. Interest cover 14. Current ratio 15. Quick ratio (acid test) 16. Earnings ratios 17. Dividend ratios 18. Other ratios 19. Sources of information 20. Conclusion

• Magic Numbers