ROCE

• What does ROCE stand for?

  Return on Capital Employed
• What does ROCE measure?

  How efficiently a business manages its finance
• How do businesses A and B compare in terms of efficiency?

  • Both generate £10 million profit
  • Business A invests £100 million
  • Business B invests £30 million
  • Business B is more efficient
• What is the formula for ROCE?

  Operating profit / Capital employed × 100
• Where does operating profit come from?

  Profit and loss statement or income statement
• What is the structure of an income statement?

  Revenue, cost of sales, gross profit, expenses
• What is capital employed?

  Total equity plus non-current liabilities
• What makes up total equity?

  Retained profits or reserves plus share capital
• Why is it important to compare ROCE?

  To assess performance against rivals and averages
• What should you consider when interpreting a high ROCE?

  Context, such as industry averages and interest rates
• How can you improve ROCE?

  Increase operating profit while maintaining capital employed
• What is one way to decrease capital employed?

  Pay off long-term debts like loans and mortgages
• What happens to ROCE over time as debts are paid off?

  ROCE generally increases as capital employed decreases
• What are the key components of the ROCE formula?

  • Operating profit
  • Capital employed
  • Calculation: (Operating profit / Capital employed) × 100
• What factors influence the interpretation of ROCE?

  • Previous years' ROCE
  • Rivals' performance
  • Industry averages
  • Risk-free rate of return