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Hi
For top part of fraction am I right in my understanding that this is profit before tax and we ignore finance costs and share of profit of associate?
In the bottom part I thought it was just equity share cap r earnings etc but have seen adjustments made to the denominator for invest in associate (non current assess)? Also have seen items such as overdraft being added to this denominator but not sure why?
My understanding was that denominator was equity share cap reserves plus non current liabilities?
Hi,
The figure on the top is the PBIT (or operating profit), which as you say does not include finance costs of share of profit of associate.
Capital employed is equal to equity plus net debt, so you are right to start off with equity as being share capital plus reserves (retained earning and revaluation reserve). We would deduct the investment in associate as this has not been used to generate PBIT, don’t forget that we’ve not included the share of profit of associate in the top half so also don’t include the associate in the bottom half.
As cash is an idle asset and is not generating profit, we deduct it from the debt to get our net debt figure, If we are overdrawn then this is just more debt so we add it on.
Hope this clears it up and keep up the hard work.
Thanks
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