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ACCA Applied Skills · Financial Management · Financial objectives and relationship with corporate strategy

Hartley plc reports the following for the year: profit before interest and tax $1,800,000; interest expense $300,000; total equity $6,000,000; long-term debt $4,000,000 (all non-current liabilities are debt). Which of the following is the company's return on capital employed (ROCE), defined as profit before interest and tax divided by total equity plus non-current liabilities?

ROCE is 18.0%. It is profit before interest and tax of $1.8m divided by capital employed of $10m, being equity of $6m plus debt of $4m. Deducting interest or using equity alone would give the wrong ratio.

  1. A18.0%Correct
  2. B30.0%
  3. C25.0%
  4. D15.0%

Explanation

Capital employed = equity 6,000,000 + debt 4,000,000 = 10,000,000. ROCE = 1,800,000 / 10,000,000 = 18.0%. Using profit after interest (1,500,000/10,000,000 = 15.0%) is wrong because ROCE uses profit before interest. Using equity only gives 30.0% (1,800,000/6,000,000).

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