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I know the formulae for ROCE & ROE but my question is this:
What is the logic behind using “profit before interest and tax” in numerator for ROCE
BUT
”net profit after paying out all expenses but before paying dividends” in the numerator for ROE?
An entity revalued its land and buildings at the start of the year to $60 million ($15 million for the land). The property cost $30 million ($6 million for the land) ten years prior to the revaluation. The total expected useful life of 40 years remained unchanged. The entity’s policy is to make an annual transfer of realised amounts to retained earnings.
Show the effects of the above on the financial statements for the
year.
The logic behind using “profit before interest and tax” in the numerator for ROCE (Return on Capital Employed) is to measure the profitability of a company’s operations before considering the impact of interest and taxes.
By excluding interest and tax expenses, ROCE focuses solely on the operating profitability of the company and its ability to generate returns from the capital invested.On the other hand, the logic behind using “net profit after paying out all expenses but before paying dividends” in the numerator for ROE (Return on Equity) is to measure the profitability specifically for the shareholders. ROE reflects the return generated on the shareholders’ investment after deducting all expenses, including interest and taxes, but before distributing dividends. This allows shareholders to assess the profitability of their investment in the company.
The effects of the land and buildings revaluation on the financial statements for the year would be as follows:
1. Statement of Financial Position:
Non-current assets: The value of land and buildings would increase by $30 million ($15 million for the land and $15 million for the buildings) to reflect the revaluation. Retained earnings: The realised amount from the revaluation, which is the increase in value, would be transferred to retained earnings.2. Statement of Profit or Loss:
There would be no immediate impact on the statement of profit or loss as the revaluation does not affect the entity’s income or expenses.
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