Horizon.my » efficiency indicators

Return on Capital Employed (ROCE)

larry — Mon, 13 Oct 2008 06:40:48 +0000

ROCE is a good indicator was to how well a company’s management is using its business assets to generate earnings.

ROCE = EBIT / Average Capital Employed

where EBIT is the Earnings Before Interest and Tax

Example: Petronas Dagangan Bhd
PETDAG’s earnings for the year ending 31-Mar-07 were reported as follows:

As per the above, its Average Capital Employed
(2641+3004.2) / 2= RM2,822.6 million

ROCE = 711.2 / 2822.6 = 25.2%

This means that the company is achieving a return of 25.2% on its business assets

Return on Equity

larry — Sun, 12 Oct 2008 07:45:22 +0000

ROE = Net Profit After Tax & Minority Interest / Average Shareholders Funds

ROE is a popular measure of how efficient a company is using its funds to generate income for its shareholders.

Unlike Return on Capital Employed, it does not take into account a company’s gearing position. For example, a company can increase its ROE by borrowing money and investing in assets which generate slightly more return that its borrowing cost. So the more a company gears up, the higher ROE it can achieve if it invests the borrowed funds in assets which generate a higher return compared to the financing cost.

Note: some calculations use Opening Shareholders Funds rather than Average.

Capital Employed

larry — Sat, 11 Oct 2008 07:50:18 +0000

Capital Employed is also sometimes referred to as Funds Employed. It is basically the total of a company’s Business Assets (excluding its Cash holdings) less its Trade-related Liabilities.

Capital Employed = Net Assets – Cash + Borrowings

Example: Petronas Dagangan Bhd
PETDAG’s Consolidated Balance Sheet for 2006 and 2007 were reported as follows:

Capital Employed for 2006 = 3091.7 + 15.3 – 466 = RM 2,641.0 million
Capital Employed for 2007 = 3542.9 + 5.3 – 544 = RM 3,004.2 million