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ACCA Strategic Professional · Strategic Business Reporting (International) · Analysis and interpretation of financial and non-financial information and measurement of performance

Karsa Co had revenue of $800m and operating profit of $96m in the prior year. In the current year revenue is $900m and operating profit is $90m. Capital employed (total assets less current liabilities) is $600m in both years. Which statement correctly describes the change in return on capital employed (ROCE) and its main driver?

ROCE fell from 16% to 15% because operating margin dropped from 12% to 10%, while asset turnover actually improved from 1.33 to 1.5 times. The decline is therefore margin-driven, not caused by weaker asset utilisation.

  1. AROCE fell from 16% to 15%, driven by a fall in operating profit margin from 12% to 10%, with asset turnover risingCorrect
  2. BROCE fell from 16% to 15%, driven by a fall in asset turnover
  3. CROCE rose from 15% to 16%, driven by higher revenue
  4. DROCE was unchanged at 16% because capital employed was constant

Explanation

Prior ROCE = 96/600 = 16%; current = 90/600 = 15%. Margin fell from 96/800 = 12% to 90/900 = 10%. Asset turnover rose from 1.33 to 1.5 times, so the margin fall is the driver, not turnover.

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