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That's capital

Letters

In Andrew Bolton's 'Can contractors nail profit growth?'

(NCE last week) he mistakenly uses contractors profit on turnover in a comparison with the profits of other listed companies.

Margin on turnover is just one useful tool when comparing one contractor with another, though it tells you as much about the operating style of a company than about underlying profits.

Return on capital employed is the relevant definition of profitability to use when comparing listed companies.

Contractors have been able to compete on this basis by remaining cash positive and employing relatively little capital, maintaining a comparable ROCE of 10-15%.

Year-on-year increases in profits have come about by reducing the working capital to turnover ratio.

Perversely, recent legislation to tighten up late payments may well be partly responsible for driving necessary increases in contractors margins.

Martin Godet, 13 Craddock Drive, Canterbury, Kent CT1 1DJ

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