Return on capital employed: Difference between revisions
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__NOTOC__(ROCE). | __NOTOC__(ROCE). | ||
An accounting measure of management performance, calculated as the accounting profits | 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. | ||
This measure needs care in its definition and application, because both the ' | This measure needs care in its definition and application, because both the 'profit' and the 'capital employed' inputs can be defined in different ways. | ||
For example, depending on the context, the ' | 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. | 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. | ||
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ROCE = Operating profit / (equity + non-current liabilities) | ROCE = Operating profit / (equity + non-current liabilities) | ||
In this simple context: | |||
'Operating profit' is the before-tax profit measure, often the same as profit before interest and tax (PBIT); and | |||
'Non-current liabilities' are the relevant measure of debt. | |||
===Refining the measure of capital employed=== | ===Refining the measure of capital employed=== | ||
In other contexts, the measure of debt may be defined as net debt, in other words taking account both of shorter-term debt and of the netting off of | In other contexts, the measure of 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. | ||
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* [[Book value]] | * [[Book value]] | ||
* [[Capital employed]] | * [[Capital employed]] | ||
* [[Debt]] | |||
* [[Economic value added]] | * [[Economic value added]] | ||
* [[Equity]] | * [[Equity]] | ||
* [[Non-current liabilities]] | * [[Non-current liabilities]] | ||
* [[Profit before interest and tax]] | * [[Profit before interest and tax]] (PBIT) | ||
* [[Profitability]] | * [[Profitability]] | ||
* [[Return on equity]] | * [[Return on equity]] | ||
Revision as of 13:53, 25 June 2016
(ROCE).
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.
This measure needs care in its definition and application, because both the 'profit' and the 'capital employed' inputs can be defined in different ways.
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.
Simple before-tax ROCE based on operating profit and non-current liabilities
A simple before-tax measure of ROCE is:
ROCE = Operating profit / (equity + non-current liabilities)
In this simple context:
'Operating profit' is the before-tax profit measure, often the same as profit before interest and tax (PBIT); and
'Non-current liabilities' are the relevant measure of debt.
Refining the measure of capital employed
In other contexts, the measure of 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.
