What does Return on CapitalEmployed (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 100 1 times = ROCE% So if Capital Employed is £1,456,000 and Profit before Taxation is £236,000. 236,000 £1,456,000 100 1 times = 16.2%
From the Profit and Loss Account and Balance Sheet we can calculate ROCE. Note – Capital Employed is made up of Shareholders funds and Long Term Liabilities 24.0 185 100 1 times = 12.97% 2012
Calculate the firms ROCE for both years 49 147+28 49 145+16 100 1 100 1 times times = 28% = 30.4% 2008 2007
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.