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Question
Give one word/term/ phrase for each of the following statements :
The ratio measuring the relationship between net profit and ownership capital employed.
The ratio measuring the relationship between net profit and ownership capital employed.
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Solution
ROCE
Explanation: Return on capital employed reflects the company's profitability and the efficiency with which its capital is employed.
Algebraically,
ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed
A higher ROCE indicates more efficient use of capital. ROCE should be higher than a company’s capital cost. Lower ROCE indicates that the company is not employing its capital effectively and is not adding to the shareholder value.
Explanation: Return on capital employed reflects the company's profitability and the efficiency with which its capital is employed.
Algebraically,
ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed
A higher ROCE indicates more efficient use of capital. ROCE should be higher than a company’s capital cost. Lower ROCE indicates that the company is not employing its capital effectively and is not adding to the shareholder value.
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