A company has revenue £800,000, cost of sales £560,000 and operating expenses £120,000. Its equity is £450,000 and its non-current liabilities are £150,000. What is the return on capital employed (ROCE)?
Answer and explanation
Correct answer: C. 20.0%
- Step 1: Operating profit (PBIT) = £800,000 − £560,000 − £120,000 = £120,000.
- Step 2: Capital employed = equity + non-current liabilities = £450,000 + £150,000 = £600,000.
- Step 3: ROCE = £120,000 ÷ £600,000 = 20.0%.
Answer
20.0%.
Why not the others: 15.0%: This is the operating profit margin (£120,000 ÷ £800,000), not the return on capital employed. 26.7%: This divides operating profit by equity only and ignores the long-term borrowings in capital employed. 40.0%: This uses gross profit (£240,000) instead of operating profit in the numerator.
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