Performance analysis in private sector, public sector and not-for-profit organisations: formula sheet

Key formulas

Gross profit margin

Gross profit ÷ Revenue × 100%

Shows the margin on sales after direct costs.

Operating profit margin

Operating profit (PBIT) ÷ Revenue × 100%

Shows the effect of overheads as well as direct costs.

ROCE

Profit before interest and tax ÷ Capital employed × 100%

Capital employed is usually total assets less current liabilities, which is equity plus long-term debt.

Asset turnover

Revenue ÷ Capital employed

Measured in times. ROCE = operating margin × asset turnover.

Current ratio

Current assets ÷ Current liabilities

Expressed as x : 1. Do not treat a fixed figure such as 2 : 1 as always right; norms vary by industry.

Quick ratio

(Current assets − Inventory) ÷ Current liabilities

Excludes inventory because it is the least liquid current asset.

Inventory days

Inventory ÷ Cost of sales × 365

Use the same year-end or average basis for both periods being compared.

Receivables days

Trade receivables ÷ Credit revenue × 365

Use total revenue if credit sales are not given.

Payables days

Trade payables ÷ Cost of sales (or credit purchases) × 365

Use credit purchases if given.

Working capital cycle

Inventory days + Receivables days − Payables days

The number of days cash is tied up in operations.

Gearing (debt/equity)

Long-term debt ÷ Equity × 100%

An alternative is debt ÷ (debt + equity). State which you use.

Interest cover

Profit before interest and tax ÷ Finance costs

Shows how many times profit covers interest.

Defect rate

Defect rate = Defective units ÷ Total units produced × 100%

State the base clearly. Some questions use units inspected or units sold.

Customer retention rate

Retention % = Customers kept at end of period (excluding new ones) ÷ Customers at start × 100%

Do not count customers won during the period.

Staff turnover

Staff turnover % = Leavers in period ÷ Average number of staff × 100%

Use the average headcount if given.

On-time delivery

On-time % = Deliveries on time ÷ Total deliveries × 100%

A common service quality measure.

Capacity utilisation

Utilisation % = Actual hours (or output) ÷ Maximum available hours (or output) × 100%

Use the same unit on top and bottom.

Selection rule

Good indicator = linked to an objective, measurable, controllable, timely, comparable and cost-effective

Use this as your checklist when asked to suggest or evaluate indicators.

Return on investment (ROI)

ROI = divisional profit ÷ capital employed × 100%

Use the profit and capital definitions the question gives. Capital employed is often net assets or total assets less current liabilities.

Residual income (RI)

RI = divisional profit − (capital employed × cost of capital)

Positive RI means the division earns more than the required return. Accept a project if it increases RI.

Return on capital employed (ROCE)

ROCE = profit before interest and tax ÷ (total assets − current liabilities) × 100%

Can be split into profit margin × asset turnover.

Profit margin and asset turnover

ROCE = (profit ÷ sales) × (sales ÷ capital employed)

Shows whether return comes from margin or from using assets intensively.

Gross and operating margin

Margin = profit ÷ revenue × 100%

Use gross profit for gross margin and operating profit for operating margin.

Current ratio

Current ratio = current assets ÷ current liabilities

Liquidity measure. Interpret against the industry, not a fixed target.

Gearing

Gearing = debt ÷ equity, or debt ÷ (debt + equity)

State which version you use.

Earnings per share (EPS)

EPS = earnings attributable to ordinary shareholders ÷ number of ordinary shares

Easily affected by accounting choices.

Price/earnings ratio

P/E = share price ÷ EPS

Shows market confidence in future earnings.

Dividend yield

Dividend yield = dividend per share ÷ share price × 100%

Return from dividends only.

Total shareholder return (TSR)

TSR = (dividend + change in share price) ÷ opening share price × 100%

Combines income and capital gain.

Economy

Economy = spending less on inputs, i.e. actual cost of inputs compared with the planned or benchmark cost for the same quality

Example measure: cost per unit of input, such as cost per nurse hour or cost per textbook bought. Quality must stay the same.

Efficiency

Efficiency = outputs ÷ inputs (or inputs per unit of output)

Example measure: patients treated per bed, or cost per patient treated. Compare with a target or a prior period.

Effectiveness

Effectiveness = actual outcome achieved compared with the objective set

Example measure: percentage of patients recovered or proportion of pupils reaching a set grade. Often a ratio to a target.

Value for money

VFM = economy + efficiency + effectiveness (all three together)

A body gives good VFM only when all three are acceptable. Strong in one E does not guarantee the others.

Economy

Economy = spending less on inputs of the required quality

Measured by comparing input cost with budget or benchmark, e.g. cost per hour of staff or price per unit of supplies.

Efficiency

Efficiency = outputs ÷ inputs (or input cost per unit of output)

Example: cost per patient treated, or cases handled per caseworker. It links resources used to output achieved.

Effectiveness

Effectiveness = outcomes achieved compared with objectives

Example: percentage of beneficiaries who find work after training. Often non-financial and needs a target.

Value for money

VFM = economy + efficiency + effectiveness

All three must be assessed together. Some texts add equity or ethics as extra considerations.

Proportion of income spent on cause

Charitable spend ratio = spending on the cause ÷ total income × 100%

Common donor-facing measure. A high figure is not automatically good, because it may mean underinvestment in fundraising or controls.

Economy

Economy = spending less on inputs of the right quality

Looks at the cost of resources bought. Example: cost per hour of nursing staff.

Efficiency

Efficiency = outputs ÷ inputs

Output per unit of resource used. Example: patients treated per nurse hour.

Effectiveness

Effectiveness = degree to which outputs achieve the stated objectives

Compares results with the aim, such as improved health outcomes. It is often qualitative.

Sector contrast rule

Private: profit and shareholders. Public and NFP: service objectives and many stakeholders

Use this as the starting frame for any comparison answer.

Quick revision

• Always judge a measure against the organisation's objectives, not in isolation.
• Economy means spending less to obtain inputs of the right quality; efficiency means getting the most output from inputs; effectiveness means achieving the objectives.
• Value for money is the combination of economy, efficiency and effectiveness.
• Profitability ratios show returns; liquidity ratios show short-term cash safety; gearing shows financial risk.
• Compare ratios with prior years, budgets, competitors or industry averages, since one figure alone says little.
• Non-financial indicators often show future performance, while financial figures show past results.
• Private sector measures centre on profit, return on capital and growth in shareholder wealth.
• Public and not-for-profit bodies have multiple, often conflicting objectives and no single profit measure.
• Outputs are easier to measure than outcomes, and outcomes are what really matter in public services.
• Measurement problems include short-term focus, manipulation of figures, and ignoring factors outside managers' control.
• Objective test answers are all or nothing, so check units, formulas and the exact wording of the question.
• In written answers, give a point, support it with scenario data, then explain its meaning or give a recommendation.

Common mistakes

• Using profit after interest in ROCE. Fix: Use profit before interest and tax, because capital employed includes debt that earns the interest.
• Mixing bases between years, such as year-end inventory for one year and average for the other. Fix: Choose one basis and apply it to all periods.
• Listing indicators with no explanation. Fix: Write each as 'measure, what it shows, why it matters here'. One clear sentence each.
• Suggesting measures unrelated to the scenario's objectives. Fix: Quote the objective or problem first, then choose a measure that tracks it.
• Quoting ratios without a comparison or explanation. Fix: After each ratio say whether it is better or worse than a benchmark and give a possible cause from the scenario.
• Forgetting the capital charge in residual income, or applying it to profit instead of capital. Fix: RI = profit − (capital employed × cost of capital). Compute the charge as a separate line.
• Treating economy and efficiency as the same thing. Fix: Economy is the cost of inputs bought. Efficiency is output achieved from the inputs used. Ask whether the figure is about buying or about using.
• Calling a lower-cost result effective. Fix: Effectiveness is about meeting objectives. A cost saving only shows economy or efficiency. Check the outcome.
• Using profit, ROI or EPS as the main measure of an NFP. Fix: Start from the mission. Say surplus is only needed to sustain operations, and use VFM measures instead.
• Mixing up efficiency and effectiveness. Fix: Efficiency is output per unit of input. Effectiveness is whether the objective was achieved. Check each measure against these two definitions.

Exam tips

• Always state the formula you use when the question does not define it. Markers can then follow your logic.
• In written answers, calculate first, then spend most of your time on comment. Comments carry the marks in Section C.
• Use the margin and turnover split to explain ROCE or ROI changes. It shows you understand the cause.
• In objective questions, read carefully for the profit measure and denominator; a wrong choice scores nothing.
• Mention at least one limitation of ratio analysis when asked to evaluate performance.
• Always tie each indicator to the organisation's objective. Marks go for relevance, not for the longest list.
• Group your answer under headings such as quality, customer, employee and operational. It is easy for the marker to follow.
• In calculations, state the formula and base. Show units and a short comment on what the figure means.