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Chapter 11

2.2 More on the ROCE

A widely used and accepted measure. May lead to dysfunctional decision
making, e.g. a division with a current
ROCE of 30% would not wish to accept a
project offering an ROCE of 25%, as this
would reduce its current figure.

As a relative measure it enables Different accounting policies can confuse
comparisons to be made with divisions or comparisons.
companies of different sizes.

It can be broken down into secondary ROCE increases with age of asset if
ratios for more detailed analysis. NBVs are used, thus giving managers an
incentive to hang on to possibly
inefficient, obsolete machines.

ROCE = Profit/Capital employed
C

Asset turnover =
Turnover/Capital employed
A B
Profit margin =
Profit/Turnover employed

There is a direct relationship between the three figures.

All figures are used twice, meaning A × B = C

Illustrations and further practice

Now try TYU 1 ‘Profitability ratios’.

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