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.
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revenue 500000
gross profit 120000
operating profit 50000
loan 8% per year 60000
Asset turnover 4calculate ROCE and Gearing and interest cover
capital employed = revenue / asset turnover= 500000/4= 125000
roce = net profit/capital employed
so 50000/125000*100= 40%which is right as per answer in kaplan
problem is in gearing = debt/equity+debt
they are calculating as 60000/125000+60000= 32.43%now we know that capital employed is asset – current liabilities
or total equity + long term debthere the loan is a long term debt so isn’t 60000 loan is already added into the capital employed 125000
so why the are further adding 60000 to 125000another question
is the operation profit is same as net profitFirst question:
I think that Kaplan are wrong. Because they agree that capital employed (for ROCE) is 125,000, then this does include the 60,000 long term debt and so they should not have added it again in calculating the gearing.
Second question:
Operating profit is the profit before interest and tax, and for the purpose of ratios this is what net profit means.
In financial accounts, net profit is profit after interest and tax, but this is not the case when we calculate ratios.in kaplan book the formula for ROi given as
ROI = Controllable Profit/controllable capital employed x100
i wanna know can u plz clarify this controllable term, and how we we find out normally in questions if only operation profit is given.Do we assume that operating profit is the controllable profit.
If it is being used to measure the performance of the manager, it is then that we use the controllable profit – which it those items that are controlled by the manager. So, for example, if wages are determined by head office (and not by the manager) then they are left out of the profit calculation.
The question will make it clear which items are not controllable by the manager. If you are not told anything then you assume all of the profit is controllable.
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