ACCA Applied Knowledge · Financial Accounting · Analysis of financial statements
Omega Co reports profit before interest and tax of $360,000, finance costs of $40,000, and tax of $80,000. Equity is $1,000,000 and non-current liabilities (all debt) are $500,000. Which is the return on capital employed (ROCE), based on profit before interest and tax and equity plus non-current liabilities?
ROCE is 24.0%. Profit before interest and tax of $360,000 is divided by capital employed of $1,500,000, being equity of $1,000,000 plus long-term debt of $500,000. Deducting interest or tax from the numerator would be incorrect.
- A24.0%Correct
- B20.0%
- C21.3%
- D36.0%
Explanation
Capital employed = 1,000,000 + 500,000 = 1,500,000. ROCE = 360,000 / 1,500,000 = 24.0%. Using profit after interest and tax (240,000) gives 16%; using profit after interest (320,000) gives 21.3%. Using equity only gives 36%.
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