The figures shown in the table below are an extract from the accounts of Ridgeway (capital employed is $1.5m).
What is the return on capital employed (ROCE)?
Revenue
$1,000,000
Cost of sales
($400,000)
Gross profit
$600,000
Distribution expenses and administration cost
($300,000)
Profit before interest and tax
$300,000
Finance cost
($50,000)
Profit before tax
250,000
Income tax expenses
($100,000)
Profit after tax
$150,000
The correct answer is: 20%.
20% is the return on capital employed.
ROCE is defined as the profit on ordinary activities before interest and tax divided by capital employed.
This would equal $300,000 ($600,000 gross profit less $300,000 distribution and administrative expenses) divided by $1.5m which equals 0.2 or 20%.
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