What’s ROCE? 🤔

ROCE, or Return on Capital Employed, is our trusty accounting ratio friend. It’s like the superhero in the financial world that helps assess the performance of an organization. Imagine you’ve been given a kingdom (or a company), and ROCE tells you how well you’re reigning supreme over it! It expresses the profit of your kingdom in relation to the capital you employed to run it.

The ROCE Formula 🧙‍♂️

The magical formula for ROCE looks like this:

    graph LR
	A[(ROCE)] --> B(((Profit Before Interest and Tax)))
	B --> C(((Capital Employed)))

Basically, ROCE is calculated as:

expecto_profitum_per_interestum! ROCE = (Profit Before Interest and Tax / Capital Employed) * 100

Calculating Capital Employed 🏰

Capital Employed is not a mythical beast but a straightforward calculation:

• Fixed Assets
• Current Assets
• Minus Current Liabilities

Stir these ingredients together, and voila – your Capital Employed!

Example: The Tale of Three Divisions 📚

In our fairy-tale kingdom (a company), there are three divisions: North, East, and West. Here’s their performance:

    graph TD
	DivisionA[North Division]
	DivisionB[East Division]
	DivisionC[West Division]
	ProfitA[Profits ~ $$]
	ProfitB[Profits ~ $$]
	ProfitC[Profits ~ $$]
	CapitalA[Capital ~ $$]
	CapitalB[Capital ~ $$]
	CapitalC[Capital ~ $$]
	
	DivisionA -- ProfitsBeforeInterestAndTax --> ProfitA
	DivisionB -- ProfitsBeforeInterestAndTax --> ProfitB
	DivisionC -- ProfitsBeforeInterestAndTax --> ProfitC
	DivisionA -- CapitalEmployed --> CapitalA
	DivisionB -- CapitalEmployed --> CapitalB
	DivisionC -- CapitalEmployed --> CapitalC

Using the ROCE, it looked something like this:

• North Division: ROCE = 25%
• East Division: ROCE = 18%
• West Division: ROCE = 12%

Looks like the North Division is the star player (or should I say, knight!) in making the best use of its capital! 🏆

The Flip Side ⚖️

While ROCE is our valiant knight against poor investments, a wise ruler knows not to rely solely on one advisor.

• Profit Margins: How much treasure (profit) is made from every dollar of sales.
• Capital Turnover Ratios: How frequently are you able to transform your capital into profit?

Shareholders vs. Management: The Battle for ROCE 👥

While the management might look at profit before interest, shareholders might get their spectacles out to peek at profit after interest for a holistic understanding of how their money is doing.

Test Your Knowledge! 🧠

Ready to wear your crown and test your ROCE knowledge?