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Hello.
Could you explain the relationship between ROCE and the cost of borrowings?
Thanks.
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
It’s actually from the KAPLAN book.
It says that once calculated, ROCE should be compared with the cost of borrowings.
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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