Financial Reporting and Ethics - The Institute of Chartered ...

FINANCIAL REPORTING AND ETHICS(a)Return on Capital Employed (ROCE): This is the ratio of netprofit to capital employed. It is also known as the return oninvestment (ROI) ratio or the primary ratio, as it is the measureof the primary aim of the business, that is, return on the fundsinvested in the business. If the return is low, the firm must seekways of improving upon its profit level or seek alternative use ofits funds. Furthermore, its decrease from one year to the other isa sign of unfavorable result to the business and, so, managementmust adopt appropriate strategies to improve on the ratio byminimizing costs/expenses, maximizing sales/turnover andreducing outright acquisition of too many fixed assets. Thegeneral form of this ratio is given by:ORNet Profit after TaxNet Assetsx 100%Net Profit after Tax x 100%Capital EmployedROCE can also be referred to as return on average net assets(ROANA)/ROA, return on total assets (ROTA), and return on equity(ROE).These are calculated as follows:(i)ROA/ROANA = Net profit after taxAverage Net Assetsx 100%(ii) ROTA = Net profit after tax x 100%Total Assets(iii)ROE = Profit after interest and preference dividendsOrdinary Share Capital + Reservesx 1OO%This ratio (ROCE) can be calculated in several ways, dependingupon the interpretation given to the denominator, that is, capitalemployed. It could be total capital or the equity shareholders’capital. Some of its variants are:(i) Net profit before loan interest and taxation x 100%Shareholders’ fund + Loan Capital(ii) Net profit after tax x 100%Shareholders’ fund(iii) Net profit before tax x 100%Shareholders’ fund74