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Hi Mike,
What is the relationship between the finance cost of a long term debt and the ROCE of the company? How does this relationship affect shareholders of the company?
Hope you could help me on this, thank you!
Where’s this question from?
I ask because in that previous post of yours about provisions you missed off your original post the crucial information about “sales value under the company’s returns policy”
This question revolves around the financial ratios topic (unrelated to any of the previous questions or any specific question). Sorry if I had confused you!
If you accept that ROCE is calculated as Earnings before interest and tax / capital employed and …
… capital employed is shareholders’ funds + long term debt …
… then the relationship is that the debt is included in the denominator whereas the cost of servicing that debt is not deducted when arriving at the numerator
OK?
I don’t quite understand the relationship still, if the ROCE (say, 15%) is higher than the finance cost (say, 10%) of loan notes, does it mean that shareholders are getting a slight benefit from the debt? If yes, why is that so?
It means that the entity is using other people’s money to generate 15% but it’s only costing 10% to borrow that money
OK?
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