ROCE

Biggles, you are correct – but please restrict your input to the general forum in future

Thanks

What you have just written is the same as Biggles’ reply! And I agreed with Biggles’reply!!!!

Return on capital employed? Another way of describing “return” is to call it “profit margin”

Another description for “capital employed” is “net assets” so “asset / turnover” relates net assets to revenue

And “return on capital employed” then becomes:

“Net profit (pbit) / revenue” (that’s the profit margin bit)

multiplied by

“Revenue / net assets” (that’s the asset turnover bit)

Revenue cancels out and leaves:

Net profit (pbit) / net assets and that, literally, is “return” on “capital employed”

Ok?

These two sub-ratios are related only by the fact that they both use “revenue” as the numerator

So we can’t add these two to arrive at the same figure as asset/turnover, nor multiply nor divide them

Use some made up figures … let’s say that revenue is 100 and capital employed is 80

And capital employed is represented by non-current assets of 60 and net current assets of 20

So asset turnover is 100/80 = 1.25 (revenue / total net assets)

And revenue / non-current assets is 100/ 60 = 1.33 whereas

revenue / net current assets is 100/20 = 5

Can you see that there’s no combination of 1.33 and 5 to arrive back at 1.25?

OK?