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ACCA Applied Skills · Performance Management · Performance analysis in private sector, public sector and not-for-profit organisations

Jarrow Co's operating profit margin fell from 12% to 9% while its asset turnover rose from 2.0 times to 2.5 times. Assuming ROCE is margin multiplied by asset turnover, what has happened to ROCE?

ROCE has fallen from 24.0% to 22.5%. ROCE equals margin times asset turnover: 12% x 2.0 gives 24.0%, and 9% x 2.5 gives 22.5%. The improvement in asset turnover did not fully offset the fall in profit margin.

  1. AIt has fallen from 24.0% to 22.5%Correct
  2. BIt has risen from 24.0% to 22.5%
  3. CIt has fallen from 14.0% to 11.5%
  4. DIt has remained unchanged at 24.0%

Explanation

Previous ROCE = 12% x 2.0 = 24.0%. New ROCE = 9% x 2.5 = 22.5%. So ROCE has fallen because the margin decline outweighed the turnover improvement. Adding the figures rather than multiplying gives the incorrect 14.0% and 11.5%.

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