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ACCA Applied Knowledge · Financial Accounting · Ratios

Orion Co has capital employed of $2,000,000 made up of equity $1,200,000 and 8% loan notes $800,000. Profit before interest and tax is $300,000. What is the return on capital employed (ROCE)?

ROCE is 15%. It is calculated as profit before interest and tax of $300,000 divided by total capital employed of $2,000,000, which includes both equity and the loan notes. Using equity alone would give 25%, which is the wrong base for ROCE.

  1. A15.0%Correct
  2. B25.0%
  3. C12.5%
  4. D9.0%

Explanation

ROCE = profit before interest and tax / (equity + non-current liabilities) = 300,000 / 2,000,000 = 15%. Dividing by equity only gives 25%, which is return on equity before interest and tax, and is the wrong base for ROCE.

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