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I want to ask why we have to dedict depreciation from the Profit before interest & tax of ROCE formula?
What significance does depreciation have with ROCE??
I know that it is non-cash item but why it has to be adjusted?
Any reason?The return on capital employed is an accounting measure and uses the accounting profit.
The profit before interest and tax is already after charging depreciation, as you should remember from Paper FA (was F3). We do not subtract depreciation again.The only time we would deduct depreciation would be if we were given the operating cash flow. In this case we would need to subtract depreciation to arrive at the operating profit.
I do suggest that you watch my free lectures on this. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
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