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Hi Mr. MikeLittle
Can you explain me why they calculate Roce ratio like this?
Monty had profit before tax of $3 million for the year ended 31 March 20X3, after charging loan interest of
$150,000 and interest on a lease of $250,000. Extracts from the equity and liabilities section of the statement of
financial position of Monty at 31 March 20X3 are as follows.
$’000 $’000
Total equity 12,550
Non-current liabilities
8% loan notes 1,400
Deferred tax 1,500
Lease obligation 1,200
4,100
Current liabilities
Lease obligation 750
Trade payables 2,650
Current tax 1,250
4,650
What is the return on year-end capital employed?
A 16.3%
B 21.4%
C 18.6%
D 24.3%I calculated in this way ROCE= PBIT/Capital employed= 3000+150+250/ 12550+4100
Your figure for PBIT is correct
However, if you’re going to consider profit BEFORE interest, that naturally leads on to the thought that the finance lease upon which the interest is based should be taken as part of capital employed
(And your figure of 4,100 (3000+150+250/ 12550+4100) I assume should be 1,400)
So now we have the capital employed denominator as …
12,550 + 1,400 + 1,200 + 750 = 15,900
(Those last two are the long-term and the current liabilities under the lease obligation)
So our ROCE calculation is now 3,400/15,900 and that comes to the answer given in option B
OK?
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