Return on capital employed and SOFR: Difference between pages

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imported>Doug Williamson
(Update for non-current liabilities which are not debt.)
 
imported>Doug Williamson
(Reorder abbreviation reference.)
 
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__NOTOC__(ROCE).  
''US interest rate benchmarks''.


An accounting measure of management performance, calculated as the accounting profits divided by the total book value of the capital employed to earn the profits.
SOFR is the Secured Overnight Financing Rate.  


This measure needs care in its definition and application, because both the 'profit' and the 'capital employed' inputs can be defined in different ways.
This is a broad treasuries repo financing rate, recommended as a benchmark by the Alternative Reverence Rates Committee (ARRC) of the Federal Reserve.


It is published by the New York Fed at approximately 8am local time.


For example, depending on the context, the 'profit' may be either before tax or after tax.


Similarly, whilst 'capital employed' will always include an appropriate measure for debt, the measure of debt which is considered appropriate may differ, according to the context.
3 April 2018 was the first time SOFR was published. It is calculated based on actual transactions and is a volume-weighted median.  


In the first three months of the publication of SOFR the underlying overnight lending transaction volume was on average approximately USD 800 billion.


===Simple before-tax ROCE based on operating profit and non-current liabilities===
In the absence of other more detailed information, a very simple before-tax measure of ROCE is:


ROCE = Operating profit / (equity + non-current liabilities)
LIBOR, which is currently used as the main benchmark rate, is expected to discontinue by 2021 in light of multiple irregularities and lack of sustainability in the absence of an active underlying market.


SOFR is the new benchmark USD rate (alternatively known as risk-free rate) and ARRC is working with the industry to transition to SOFR from LIBOR.   


In this very simple context:


'Operating profit' is the before-tax profit measure, often the same as profit before interest and tax (PBIT); and
==See also==
*[[Alternative Reference Rates Committee]]
*[[Federal Reserve]]
*[[LIBOR]]
*[[Reference rate]]
*[[Risk-free rates]]
*[[Repo]]
*[[Treasury]]


'Non-current liabilities' are the relevant measure of debt. It is assumed - in the absence of any other information - that all non-current liabilities are debt.


===Other links===


===Refining the measure of capital employed===
[[Media:Slaughter and May interest rate benchmarks.pdf| 2021: A Benchmark Odyssey, Practical Guidance for Treasurers on interest rate benchmarks, Slaughter and May]]
In other more advanced contexts, the measure of debt may be refined in a number of ways.


For example:
[[Category:Corporate_financial_management]]
 
*Any non-current liabilities which are identified and which are not debt are excluded from the measure of capital employed.
 
*Debt may be defined as net debt, in other words taking account both of shorter-term debt and of the netting off of most cash and cash-equivalent surpluses.
 
 
===After-tax ROCE for EVA calculations===
When ROCE is used in the calculation of economic value added (EVA), its inputs are defined as:
 
Return = PBIT x (1 - Tax rate)
 
Capital Employed = Book value of Equity + Book value of Debt.
 
 
== See also ==
* [[Accounting rate of return]]
* [[Book value]]
* [[Capital employed]]
* [[Debt]]
* [[Economic value added]]
* [[Equity]]
* [[Non-current liabilities]]
* [[Profit before interest and tax]] (PBIT)
* [[Profitability]]
* [[Return]]
* [[Return on assets]]
* [[Return on equity]]
* [[Return on investment]]
 
[[Category:Corporate_finance]]

Revision as of 09:13, 11 July 2018

US interest rate benchmarks.

SOFR is the Secured Overnight Financing Rate.

This is a broad treasuries repo financing rate, recommended as a benchmark by the Alternative Reverence Rates Committee (ARRC) of the Federal Reserve.

It is published by the New York Fed at approximately 8am local time.


3 April 2018 was the first time SOFR was published. It is calculated based on actual transactions and is a volume-weighted median.

In the first three months of the publication of SOFR the underlying overnight lending transaction volume was on average approximately USD 800 billion.


LIBOR, which is currently used as the main benchmark rate, is expected to discontinue by 2021 in light of multiple irregularities and lack of sustainability in the absence of an active underlying market.

SOFR is the new benchmark USD rate (alternatively known as risk-free rate) and ARRC is working with the industry to transition to SOFR from LIBOR.


See also


Other links

2021: A Benchmark Odyssey, Practical Guidance for Treasurers on interest rate benchmarks, Slaughter and May

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