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CS Executive · Corporate Accounting and Financial Management · Financial Statement Analysis

Which of the following is the correct formula for return on capital employed (pre-tax) as commonly taught at CS Executive level?

Pre-tax return on capital employed is earnings before interest and tax divided by capital employed. It measures how efficiently long-term funds generate operating profit. Net profit over shareholders' funds is return on equity, and sales over capital employed is a turnover ratio.

  1. ANet profit after tax divided by shareholders' funds
  2. BEarnings before interest and tax divided by capital employedCorrect
  3. CGross profit divided by net sales
  4. DNet sales divided by capital employed

Explanation

ROCE is measured as EBIT divided by capital employed (total assets less current liabilities, or equity plus long-term debt). Option one is return on equity, option three is gross profit ratio, and option four is capital employed turnover.

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