Page 374 - VIRANSH COACHING CLASSES

Capital Employed : Equity Share Capital + Preference Share Capital + Reserves and Surplus +
Debenture Capital and Other Long Term Loans
Capital Employed = Fixed Assets + Current Assets - Current Liabilities.
This ratio indicates the ability of company to generate the profit per rupee of capital Employed.

(B) Return on Capital Employed (ROCE) : This ratio measures a relationship between net profit
before interest and Tax and share holders fund. The funds are supplied Equity and Preference
Share holders.
Net Profit before interest and Tax
Return on Capital Employed :
Net Capital Employed/ Equity

Net Capital Employed = Total Assets - Current Liabilities
= Fixed Assets + Current Assets - Current Liabilities
This ratio indicates whether share holders fund is efficiently used or not.
This ratio should be higher than ROI.

Illustrations

(A) Balance Sheet Ratio:
1 : A company had following Current Assets and Current Liabilities
Debtors - ` 60,000, Creditors ` 30,000, Bills Payable ` 20,000, Stock ` 30,000, Loose Tools
` 10,000, Bank Overdraft = ` 10,000 Calculate current ratio
Solution 1 :
(1) Current Assets = Debtors + Stock + Loose Tools

= 60,000 + 30,000 + 10,000
= ` 1,00,000
(2) Current Liabilities = Creditors + Bills payable + Bank Overdraft

= 30,000 + 20,000 + 10,000
= 60,000
Current Assets
Current Ratio = Current Liabilities
1,00,000 10 5
= = = i.e. 5:3
60,000 6 3

Activity 1: A company had following Current Assets and Current Liabilities. Debtors 90,000,
Creditors 45,000, Bills Payable 10,000, Stock 40,000, Loose Tools 20,000, Bank Overdraft 20,000.
Calculate Current Ratio. (Ans = 2:1)

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