Page 384 - F2 Integrated Workbook STUDENT 2019

Chapter 18

Return on capital employed (ROCE)

This ratio outlines how effectively the entity has generated profit from its capital
invested.

Operating profit (PBIT)

–––––––––––––––––––––– × 100

Capital employed

Capital employed = equity + interest bearing borrowing

Acceptable variants do exist e.g. equity + interest bearing borrowings
– non–current assets that do not contribute to operating profit
(associates).

TUTOR GUIDANCE

Common reasons for movements in ROCE:
 Caused by movements in OP% (see above) or asset turnover

 If not in line with OP% movements, movement caused by asset turnover (how
well entity generates revenues from its NCAs)
e.g.

 revaluations

 investments in PPE near end of year – no time for asset to generate
profits
 changes in leases.

376