ROCE

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June 30, 2018 at 10:34 am #460587
adarsh1997
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Hello.

Could you explain the relationship between ROCE and the cost of borrowings?

Thanks.
June 30, 2018 at 11:14 am #460591
P2-D2
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Hi,

Sorry, but I’m not too sure that I follow your question. Could you explain where you’ve picked this point up from as then I can help.

Thanks
July 4, 2018 at 7:35 pm #460970
adarsh1997
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It’s actually from the KAPLAN book.

It says that once calculated, ROCE should be compared with the cost of borrowings.
July 4, 2018 at 8:16 pm #460978
P2-D2
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Hi,

The ROCE is the profit that the business is generating on the funds invested within it, i.e. the debt and equity. If you were an equity shareholder you would want this to be higher than the cost of borrowings as then the business is generating a high enough return to cover the cost of borrowings and give a return to you as the shareholder.

If the ROCE is less than the cost of borrowings then it would be a cause for concern as the profit generated is not sufficient to cover the cost of borrowings.

Hope that clears it up for you.

Thanks
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