How has the return on assets been achieved?
Check the return on capital employed (ROCE) and sales on capital employed to see whether the profits being made are satisfactory in relation to the capital invested in the business. Also check interest cover and gearing to see whether returns have been increased by using a large proportion of borrowed capital. Be aware that capital employed is one of the easiest figures for companies to manipulate through depreciation policies. • How much money is tied up in stock? In particular, is stock staying in line with sales, or is stock creeping up? Check the stockturn. Be aware that manufacturing for stock is sometimes used as a device to prop up profits. • Are trade debtors rising faster than sales? Slowness in collecting debts reduces the money available to the business and often conceals a bad debt. Check whether the debt collection period is increasing unduly. • Does the company get reasonable credit from its suppliers? If key suppliers are insisting on very tight credit terms (or cash wit
