Calculating Return on Capital Employed ROCE What does

Calculating Return on Capital Employed (ROCE)

What does Return on Capital Employed (ROCE) tell us? The Return on Capital Employed figure measures how effectively the capital invested in the business is being used to create profits. As a guide the ROCE should be at least 5% above the cost of borrowing, so if a firm borrows at 6%, then a target ROCE would be 11%+. But even at this level a downturn in performance could mean that borrowing to fund an investment costs more than the return produced from the investment.

How to calculate ROCE To calculate ROCE we use figures from both the Profit and Loss Account as well as the Balance Sheet The formula for ROCE is Net Profit before Taxation Capital Employed times 100 1 So if Capital Employed is £ 1, 456, 000 and Profit before Taxation is £ 236, 000 £ 1, 456, 000 times 100 1 = 16. 2% = ROCE%

Turnover 2012 £m 121. 3 2011 £m 111. 0 Fixed Assets Cost of Sales (60. 9) (57. 0) Current Assets 2012 (m) 2011 (M) 247 231 Stock 147 141 Gross Profit 60. 4 54. 0 Debtors 70 59 Expenses 36. 4 32. 6 Cash and Bank 24 86 Total Current Assets 241 286 Net Profit 24. 0 21. 4 Current Liabilities 303 261 Net Current Liabilities/Assets (62) 25 Total Assets less Current Liabilities 185 256 Long-term Liabilities 24 29 Shareholders’ Funds 161 227 Capital Employed 185 256 From the Profit and Loss Account and Balance Sheet we can calculate ROCE. 2012 Note – Capital Employed is made up of 24. 0 100 Long Term Shareholders funds and times = 12. 97% 185 1 Liabilities

Calculate the firms ROCE for both years 2007 49 145+16 times 100 1 = 30. 4% 2008 49 147+28 times 100 1 = 28%

Analysing your figures Comment on actual figures, compare to what might be acceptable, and note any trends or patterns. The Return on Capital Employed figures for the firm over both years are very good. Many companies would be happy with a ROCE of 15%, managers seeing 30. 4% and 28%, would be very satisfied that the capital invested in the firm is producing a very good return. The only slight worry is that the figure has fallen by 2. 4% over the two years, a trend that needs to be monitored carefully.