To assess whether or not a firm is earning an adequate rate of profit,return on capital employed (ROCE)is a better indicator than return on sales because:
A)Sales are more variable than capital employed
B)Return on sales varies between industries according to their capital intensity
C)A firm's return on sales depends upon the choice between gross margin,operating margin,and net margin
D)ROCE is based upon cash flow

Question

Quizplus · Accepted Answer

Return on sales can vary significantly based on the level of capital intensity in an industry, making it difficult to compare firms across industries. ROCE, on the other hand, compares a firm's earnings to the amount of capital it has invested, providing a more accurate measure of profitability. Choice A is incorrect because the variability of sales does not necessarily make return on sales a less accurate indicator of profitability. Choice C is incorrect because it implies that return on sales is dependent on management decisions, which is not necessarily the case. Choice D is incorrect because ROCE is based on both income statement and balance sheet items, not just cash flows.

To Assess Whether or Not a Firm Is Earning an Adequate