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I know the formula is slightly different, where ROCE uses PBIT while ROI uses net profit, but how are they used differently to appraise performance?
Thanks
My understanding is that ROCE is used at company level, looking at how efficient companies capital investments are where as ROI can be applied to any particular investment. i.e divisions can use ROI to see if their particular investment was worth it etc.
If anyone thinks otherwise please let me know….I’ll go jump off a cliff!
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my understanding is the same as your Begum 🙂
You may have answered your own question. PBIT – is return from operations. Net Profit is the return after the Interest and taxes (available to equity shareholders) . In essence one is an operational metric (business risk) and the other is a performance metric (incorporating both business and financial risk).
Therefore, think of ROCE as the shareholders way of assessing the business’ asset efficiency and the ROI as a shareholders way of assessing their investment efficiency.
Also helpful… remember that ROCE breaks down in to two components with a pseudo dupont style approach. Profit margin x Asset turnover = ROCE
🙂
When asked in the exam, ROI relates to divisional performance measurement.
In this respect it is exactly the same as ROCE except that of course a division has no capital employed – hence it uses total investment (i.e. total net assets unless told otherwise). (Obviously for a division there is no interest or tax involved when looking at the profit)
A good question to check the way he asks it in the exam is HFG from the June 2008 exam.
thank you very much Mr Moffat – you are kind and excellent! You are wonderful!!!
To the best of my knowledge,
ROCE= Average annual profits before interest and tax/Initial capital costs x 100%
or
ROCE= Average annual profits before interest and tax/Average capital investment x 100%
Average capital investment= Initial investment+scrap value/2
Now my question is why do I need to Profit margin x Asset turnover to get ROCE?
Hi,
Can someone pls explain to me how the above question HFG manages to get a Cost of Debt of 7% for the WACC Calc?
Many Thanks.
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