Section A

Which of the following is the correct formula for calculating the Return on Capital Employed (ROCE)?

Answer options:

Profit after tax / Total Equity

Gross Profit / Revenue

Profit before interest and tax / (Total Assets - Current Liabilities)

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.

Question 34 All questions Question 36

Practice the full ACCA FA — Financial Accounting Practice Exam 6

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