How to work out return on capital employed
Return on capital employed shows what the money tied up in a business earns in a year. Work it out and compare it.
In this room: 3 tasks, 10 questions
- What the money in the business earns3 questions
- Has the return got better or worse?2 questions
- A business with a loan5 questions
Capital employed is the long-term money tied up in the business: the owner's capital plus any long-term loans.
Return on capital employed, or ROCE, is profit as a percentage of that money: profit before loan interest ÷ capital employed × 100.
Fernhill has no loans. Its capital employed is Priya's capital of £200,000, and its profit for the year is £40,000.
Owners compare ROCE with what the same money could earn elsewhere. A business is riskier than a savings account, so it should earn more.
Answer the questions below
2 more questions follow in this task.
| Item | Last year | This year |
|---|---|---|
| Net profit | 36,000.00 | 40,000.00 |
| Capital employed | 150,000.00 | 200,000.00 |
Priya put a further £50,000 into the shop this year to refit it.
ROCE falls when capital grows faster than profit. New money often takes time to earn its keep.
Answer the questions below
1 more question follows in this task.
A long-term loan is part of capital employed. The return is measured on all the long-term money, whoever supplied it.
That is why the profit used is the profit before loan interest, often called operating profit.
| Item | £ |
|---|---|
| Operating profit | 18,000.00 |
| Owner's capital | 90,000.00 |
| Long-term bank loan | 30,000.00 |
Answer the questions below
4 more questions follow in this task.