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CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis

Which of the following ratios is calculated as (Net Profit after tax + Interest on long-term debt × (1 − t)) ÷ Capital Employed, and is therefore a measure of the overall return generated on long-term funds?

The ratio is Return on Capital Employed on a post-tax basis. Post-tax interest is added back to net profit because the numerator must represent the return to all long-term providers of funds, which is then compared with total capital employed rather than equity alone.

  1. AReturn on Equity
  2. BReturn on Capital Employed (post-tax basis)Correct
  3. CEarnings per Share
  4. DProprietary Ratio

Explanation

Adding back post-tax interest to net profit gives the return available to all long-term fund providers, and dividing by capital employed gives ROCE on a post-tax basis. Return on Equity uses only equity shareholders' funds as the denominator and does not add back interest. EPS is a per-share measure and the proprietary ratio is a solvency measure.

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