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(165)-PROFITABILITY AND RETURN ON CAPITAL RATIOS

Thursday, April 29, 2010

Profitability and Return on Capital Ratios

Profit on ordinary activities before taxation is generally thought to be a better figure to use than profit after taxation, because there might be unusual variations in the tax charge from year to year which would not affect the underlying profitability of the company’s operations.

Another profit figure that should be calculated is PBIT, profit before interest and tax. This is the amount of profit which the company earned before having to pay interest to the providers of loan capital. By providers of loan capital, we usually mean longer-term loan capital, such as debentures and medium-term bank loans, which will be shown in the balance sheet as “creditors: amounts falling due after more than one year”.

Profit before interest and tax is therefore:
  1. The profit on ordinary activities before taxation
  2. Plus interest charge on long-term loan capital


Published accounts do not always give sufficient detail on interest payable to determine how much is interest on long-term finance.

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