Business Studies Collins Revision Guide. - StudyGuide.PK

●●●BUSINESS FINANCE (4)Return on capital employed (ROCE) shows how much net profitthe business is making in proportion to the amount of capitalinvested into the business.A high return on capital employed shows that the investment intothe business was worthwhile. It can be compared with othercompanies, previous years or the amount of return the owners couldhave obtained by putting their money into a bank savings account.Return on capital employed (ROCE) =Net profit × 100%Total capital employedCase studySally’s Ice Cream ParlourYear 1Net profit = £4000Capital employed = £32 000ROCE =Net profit × 100%Total capital employed= 4000 × 100%32 000= 400%32= 12.5%This shows that for every £100 invested into the business a profit of £12.50 is being made.Year 2Net profit = £6000ROCE =Net profit × 100%Total capital employed= 6000 × 100%32 000= 600%32= 18.75%Therefore the return on capital employed has improved.48