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Greetings sir. Can you please help me understanding why profit before interest and tax/ earnings before interest and tax is considered for ROCE calculation, rather than say, a PAT or PBT ?
According to my earlier understanding, the reason was because while assessing the profit generated from a particular project/investment, we are interested in knowing what is directly attributed to such investment and so the tax payment or interest payment is an un-controllable factor (being a mandatory payment) which cannot be taken into consideration while evaluating a particular project.
I’d be glad to hear from you if my understanding is right or if there is any other side to understand the same.
Thanks in advance.
Your understanding is correct. The ROCE is used to measure how well (or badly) management is performing in terms of investing in profitable operations. This is separate from how finance is being raised (which affects the interest paid) and separate from whatever tax the state chooses to charge.
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