Return on Capital Employed

• What is return on capital employed a useful measure for?

  • Evaluate the overall performance of the business
  • Provide a target return for individual projects
  • Benchmark performance with competitors
• Return on capital employed is a profitability ratio
• How do you calculate return on capital employed?

  (Operting profit)/(Capital employed) x 100
• How do you calculate capital employed?

  Total equity + non-current liabilities
• Return on capital employed is a widely-used measure of return on investment for a business
• Return on capital employed is only based on a snapshot of a business' balance sheet
• A business can check of their return on capital employed is good by comparing their figure to competitors or the industry average
• When calculating return on capital employed where would you get the operating profit figure from?

  Income statement
• When calculating return on capital employed where would you find the capital employed figure from?

  Balance sheet
• How do you calculate total equity?

  Retained profits + share capital
• Where would you find total equity and non-current liabilities figures when trying to calculate return on capital employed?

  Balance sheet
• What do you want to compare the return on capital employed to when evaluating if its a good figure?

  • Previous years
  • Competitors and industry average
  • Risk free rate of return (Bank interest rates)
• What are the two ways of improving the return on capital employed?

  • Increase operating profit
  • Decrease capital employed
• How can a business improve their operating profit?

  • Increase revenue
  • Decrease costs
• Why would a business' capital employed decrease over time?

  The non-current liabilities are being paid off but this is only true if the business doesn't get more debt