Is the money tied up in the business earning its keep?
The operating profit the business produces for every pound invested in it. It shows whether the capital tied up in the business is earning more than it could earn elsewhere.
Get a finance reviewOperating profit (EBIT) ÷ (Total assets − Current liabilities) × 100
Above 15% is generally healthy for small businesses. Anything consistently below the owner's cost of borrowing, or below what the capital could earn elsewhere, needs questioning.
Operating profit before interest and tax, divided by capital employed: the total of equity and long-term debt, or total assets less current liabilities. It is expressed as a percentage and is usually calculated annually.
Profit alone does not show whether a business is a good use of money. A business making £200,000 on £2 million of capital is performing very differently from one making the same profit on £400,000. Return on capital employed allows that comparison, and shows whether growing the business, which usually needs more capital, is actually improving returns. It is a standard measure for investors, lenders and buyers.
Use average capital employed over the year rather than the year-end figure. Adjust profit for any owner salary that is well above or below market, so the return reflects the business rather than how the owner chooses to be paid. Break it down into margin and asset turnover to see what is driving it: a DuPont analysis shows whether returns come from pricing, efficiency or borrowing.
Most owner-managed businesses don't, or they work it out in a way that flatters the result. We'll calculate it from your own numbers and show you what it's telling you.
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