Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA APM Exams › What’s the difference between ROCE and ROI in they way they are used?
- This topic has 10 replies, 8 voices, and was last updated 8 years ago by Sean.
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- June 8, 2010 at 8:37 am #44541
I know the formula is slightly different, where ROCE uses PBIT while ROI uses net profit, but how are they used differently to appraise performance?
Thanks
June 8, 2010 at 10:19 am #63714My understanding is that ROCE is used at company level, looking at how efficient companies capital investments are where as ROI can be applied to any particular investment. i.e divisions can use ROI to see if their particular investment was worth it etc.
If anyone thinks otherwise please let me know….I’ll go jump off a cliff!
June 8, 2010 at 10:48 am #63715AnonymousInactive- Topics: 0
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my understanding is the same as your Begum π
June 8, 2010 at 11:16 am #63716Thanks, you have saved me from certain death π
June 8, 2010 at 11:42 am #63717You may have answered your own question. PBIT – is return from operations. Net Profit is the return after the Interest and taxes (available to equity shareholders) . In essence one is an operational metric (business risk) and the other is a performance metric (incorporating both business and financial risk).
Therefore, think of ROCE as the shareholders way of assessing the business’ asset efficiency and the ROI as a shareholders way of assessing their investment efficiency.
Also helpful… remember that ROCE breaks down in to two components with a pseudo dupont style approach. Profit margin x Asset turnover = ROCE
π
June 9, 2010 at 10:28 am #63718When asked in the exam, ROI relates to divisional performance measurement.
In this respect it is exactly the same as ROCE except that of course a division has no capital employed – hence it uses total investment (i.e. total net assets unless told otherwise). (Obviously for a division there is no interest or tax involved when looking at the profit)
A good question to check the way he asks it in the exam is HFG from the June 2008 exam.
November 30, 2013 at 5:07 am #148565thank you very much Mr Moffat – you are kind and excellent! You are wonderful!!!
November 30, 2013 at 5:13 am #148568your answer is very clear and easy to understand
June 1, 2016 at 6:05 pm #318702To the best of my knowledge,
ROCE= Average annual profits before interest and tax/Initial capital costs x 100%
or
ROCE= Average annual profits before interest and tax/Average capital investment x 100%
Average capital investment= Initial investment+scrap value/2
Now my question is why do I need to Profit margin x Asset turnover to get ROCE?
November 23, 2016 at 10:18 am #350928Hi,
Can someone pls explain to me how the above question HFG manages to get a Cost of Debt of 7% for the WACC Calc?
Many Thanks.
November 23, 2016 at 11:07 am #350933apologies pls ignore
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