ROCE - Urgent help needed please!!!!

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phunkyphantom22
phunkyphantom22 Registered Posts: 166 Dedicated contributor 🦉
in AAT Level 3 (Level 6 in Scotland)
Hi

Can someone help me with this - my brain has decided to stop working!

I know ROCE is profit/capital employed x 100, but can someone confirm that I am correct in using the net profit figure? I'm sure that is right but can't find anything in my books.

Also I think I may be doing something wrong on a practice question - my profit is higher than capital i.e. 300,000 net profit/100,000 capital x 100 = 300%. Is that right and it's just a great return???

On the balance sheet I am given capital and retained profit b/f - should I be adding those 2 together to get capital employed? I didn't think I did but it makes a more sensible % when I do?

Help please!!!! :-)

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  • crispy
    crispy Registered Posts: 466 Dedicated contributor 🦉
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    Hello

    ROCE should be calculated as Operating Profit (ie: Profit before interest & Tax) over Caital Employed X 100.

    Capital employed is calculated either as Equity (ie: The sum of Ord/Prem Share Cap, Retained Earn., Reval. Reserve) plus any non-current liabilites (eg. Debentures. long term loans), or as Non-current asstets plus current assets less current liabilities.

    I believe this is correct :cool2:
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034 mod
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    Retained profit is part of the capital employed

    So if you have a value for capital this should include all the reserves including the profit retained. Afterall this has all been at the disposal of the management and used to produce the profits.

    And to repeat part of Crispy's reply, all borrowed funds have also been at management's disposal so they are also part of the capital employed.
    Sandy
    sandy@sandyhood.com
    www.sandyhood.com
  • phunkyphantom22
    phunkyphantom22 Registered Posts: 166 Dedicated contributor 🦉
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    Great - thanks.

    However now a little more confused about capital employed! The total of my capital, retained profit and current year profit is obviously equal to my net asset total (fixed + current assets - current liabilities).

    So if I used this figure, it would be including my current year profit - is that right?? I thought I should just add capital and retained profits....

    Also, I have to discuss the reasons behind the results of ROCE and profit margins and make recommendations on how they could be improved.

    I can say increase selling price and look at decreasing costs to improve profit margins, but how can ROCE be improved? If some of the retained profits with withdrawn by owners, that would improve it - but is that a good reason??

    Also I am a bit stuck on understanding how I explain the results - I have 2 subsidiaries results and combined results, am I meant to compare the 3?
  • phunkyphantom22
    phunkyphantom22 Registered Posts: 166 Dedicated contributor 🦉
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    Can someone help me with my questions please? Have my test tomorrow morning - eek!
  • visha
    visha Registered Posts: 218 Dedicated contributor 🦉
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    Look at this site http://www.bized.co.uk/compfact/ratios/ror3.htm

    Firstly Profits earned can be more then capital employed. A fruit and veg man selling his fruits on the market stall may not have more then £5000 capital employed. (assume his daily stock of £1000 and a motor van of £4000).

    Do you think his profit for the year is going to be less then £5000?

    assuming his margin is 30% and his weekly stock turn over is £4900 then his weekly gross profit will be £2100 or annual Gross profit of £100,800 (assuming 48 weeks in a year)

    Therefore net profits can be more then the Capital Employed.

    In addition to the above feedback CAPITAL EMPLOYED EQUAL TOTAL ASSETS.

    See Crispy's feedback above.

    Therefore what is the total assests employed as at the end of the year? Does it include this year's profit?

    Yes!

    then Total assets is also equal to Capital plus Retained profit plus long term liabilities = Funds available to the managers of the business.

    Return on capital can be improved by

    either increasing the profits

    or reducing the capital and/or long term liabilities.
  • phunkyphantom22
    phunkyphantom22 Registered Posts: 166 Dedicated contributor 🦉
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    Fab - thanks! :-)

    Any suggestions on ways of improving ROCE?

    Also it says to explain the results - what am I meant to comment on?!

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