A potential investor is analysing the financial statements of a company. Which ratio would be most useful to assess the return on their investment?

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Question

A potential investor is analysing the financial statements of a company. Which ratio would be most useful to assess the return on their investment?

Accepted Answer

Return on capital employed (ROCE) — Award 1 mark for correct selection. ROCE measures how efficiently a business generates profit from capital invested. A is incorrect — the current ratio measures short-term liquidity, not profitability. C is incorrect — inventory turnover measures efficiency of stock management. D is incorrect — trade payables turnover measures payment period to suppliers.

Answer

Current ratio

Answer

Return on capital employed (ROCE)

Answer

Trade payables turnover

Answer

Inventory turnover

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