Return on capital employed: Difference between revisions
imported>Doug Williamson (Spacing.) |
imported>Doug Williamson (Expand and add link.) |
||
| Line 1: | Line 1: | ||
(ROCE). | __NOTOC__(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. | 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. | ||
| Line 6: | Line 6: | ||
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: | When ROCE is used in the calculation of economic value added (EVA), its inputs are defined as: | ||
| Line 20: | Line 36: | ||
* [[Profit before interest and tax]] | * [[Profit before interest and tax]] | ||
* [[Profitability]] | * [[Profitability]] | ||
* [[Return on equity]] | |||
* [[Return on investment]] | * [[Return on investment]] | ||
[[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.
