7.2 Return on capital Employed (ROCE)

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7 Terms

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What is ROCE used for ?

  • used to measures how efficiently a business manages its finance

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How is ROCE calculated ?

ROCE = operating profit x capital employed x 100

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List examples of non current liabilities

  • Bank loans, long term debts, debentures, mortgages

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How is total equity calculated ?

Retained profits + Share capital

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What does it mean if a business has a high ROCE?

  • The higher the ROCE the better.

  • means that the company is efficiently using its capita; to generate profits.

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To ensure ROCE is normal what can it be compared to?

  • ROCE should be compared to previous years

    • ROCE should be compared to industry rivals/industry average

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How to improve ROCE?

  • ensure that operating profit increases faster than capital employed

  • decrease capital employed but maintain operating profit - this will happen naturally as non current liabilities (bank loans) decrease over time - assuming that the business does not take up more debt