Final answer:
Financial capital is essential for businesses to generate profits, and companies may choose among borrowing, bonds, or stock to acquire it. Ratios like Operating Profit Margin, Asset Turnover Ratio, and Return on Capital Employed indicate a company's efficiency and profitability. Together, they provide insight into how well a company is using its capital to generate profits.
Step-by-step explanation:
Financial capital refers to the funds that firms use to acquire resources and fund their operations.
Access to financial capital is essential for businesses as it directly relates to profits by enabling the creation of goods or services that generate revenue.
Businesses need to consider several sources, such as borrowing, issuing bonds, or selling corporate stock, each with its terms and trade-offs.
The operations of a company in generating profit and managing assets are reflected in certain financial ratios.
The Operating Profit Margin is a measure of a company's operational efficiency, indicating the percentage of revenue that remains after covering operating expenses.
Asset Turnover Ratio expresses how effectively a company uses its assets to generate sales, calculated by dividing revenue by total assets.
The Return on Capital Employed (ROCE) provides a ratio of earnings before interest and tax (EBIT) to capital employed, indicating the performance and profitability of a company's capital investments.
These ratios are linked as they collectively represent how well a company is using its capital to generate profits. High operating profit margins mean a company retains more revenue from each dollar of sales after covering operating expenses.
When combined with a high asset turnover ratio, it implies that the company is efficiently using its assets to generate sales. If both are high, it typically leads to a higher ROCE, indicating a strong return on capital employed.
Conversely, weaknesses in any one of these ratios can signal areas where improvements could lead to better financial performance.