Return and Return on capital employed: Difference between pages

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1.
__NOTOC__(ROCE).  


The surplus of the amount received back from an investment, compared with the initial amount invested.  
An accounting measure of management performance, calculated as the accounting profits ('return') divided by the total book value of the capital employed to earn the profits.


To facilitate comparisons, return is usually expressed as a percentage of the initial amount invested, often as an effective annual rate of return.
This measure needs care in its definition and application, because both the 'return' and the 'capital employed' inputs can be defined in different ways.


When expressed on this basis, the rate of return is also known as 'yield'.


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


Returns can be negative.  
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.


Negative returns mean that the amounts received back from an investment are less than the amounts initially invested.


===Simple before-tax ROCE based on operating profit and non-current liabilities===
A simple before-tax measure of ROCE is:


2.
ROCE = Operating profit / (equity + non-current liabilities)


The total amount received back at the end of investment period.


===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 the netting off of relevant cash surpluses.


3.


A regular and standard-formatted report.  
===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 ==
== See also ==
*[[Effective annual rate]]
* [[Accounting rate of return]]
*[[Holding period return]]
* [[Book value]]
*[[Performance spread]]
* [[Capital employed]]
*[[Portfolio investment]]
* [[Economic value added]]
*[[Rate of return]]
* [[Profit before interest and tax]]
*[[Rewarded risk]]
* [[Profitability]]
*[[Risk]]
* [[Return on equity]]
*[[Total return]]
* [[Return on investment]]
*[[Yield]]


[[Category:Corporate_finance]]
[[Category:Corporate_finance]]

Revision as of 13:08, 2 June 2016

(ROCE).

An accounting measure of management performance, calculated as the accounting profits ('return') 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 'return' and the 'capital employed' inputs can be defined in different ways.


For example, depending on the context, the 'return' 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)


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 the netting off of relevant cash 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

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