ExpertEasy2 marksMultiple Choice
ACCA · Question 35 · Interpretation of Financial Statements
Section A
Which of the following is the correct formula for calculating the Return on Capital Employed (ROCE)?
Section A
Which of the following is the correct formula for calculating the Return on Capital Employed (ROCE)?
Answer options:
A.
Profit after tax / Total Equity
B.
Gross Profit / Revenue
C.
Profit before interest and tax / (Total Assets - Current Liabilities)
D.
Profit before tax / Total Assets
How to approach this question
Recall the definition of Capital Employed (Equity + Non-Current Liabilities, or Total Assets - Current Liabilities) and the appropriate profit figure to match it (Profit Before Interest and Tax, as interest is the return to debt holders).
Full Answer
C.Profit before interest and tax / (Total Assets - Current Liabilities)✓ Correct
Return on Capital Employed (ROCE) measures how efficiently a company uses its long-term capital to generate operating profit. The formula is Profit Before Interest and Tax (PBIT) divided by Capital Employed. Capital Employed can be calculated as Total Assets less Current Liabilities (or Total Equity plus Non-Current Liabilities).
Common mistakes
Using Profit After Tax instead of PBIT, or dividing by Total Assets instead of Capital Employed.
Practice the full ACCA FA — Financial Accounting Practice Exam 6
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