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ACCA Applied Knowledge · Financial Accounting · Analysis of financial statements

Ellis Ltd reports profit before interest and tax of $360,000, finance costs of $40,000, and capital employed (equity plus non-current liabilities) of $2,400,000. Non-current liabilities are $800,000. What are the return on capital employed and the gearing ratio (debt/equity)?

ROCE is 15% and gearing is 50%. ROCE uses profit before interest and tax of 360,000 over capital employed of 2,400,000. Equity is 1,600,000, so debt to equity is 800,000 divided by 1,600,000, which is 50%.

  1. AROCE 15% and gearing 50%Correct
  2. BROCE 15% and gearing 33.3%
  3. CROCE 13.5% and gearing 50%
  4. DROCE 13.5% and gearing 33.3%

Explanation

ROCE = PBIT/capital employed = 360,000/2,400,000 = 15%. Equity = 2,400,000 - 800,000 = 1,600,000, so debt/equity = 800,000/1,600,000 = 50%. Using profit after finance costs gives 13.3%, and 33.3% is debt/(debt+equity).

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