IAS 1 ROCE Flashcards
What is capital employed?
Represents debt and equity with which company generates profits
What is ROCE generally considered to be?
A primary profitability ratio
Why is ROCE a primary profitability ratio?
It shows how well a business has generated profit from its long-term financing
What is an improvement in ROCE?
An increase in it
How are movements in ROCE best interpreted?
Through examining secondary ratios
Why is there an improvement in ROCE?
An improvement in margins
More efficient use of assets
Examples of secondary ratios?
Profit margins
Asset turnover
Manufacturing company and ROCE?
Has higher assets and therefore a lower ROCE
How to split ROCE?
Operating margin
Capital employed
Old assets and ROCE?
Have a lower carrying amount resulting in low capital employed and high ROCE
Leased assets and ROCE?
Portion of lease liability appears under non-current liability. Increasing capital employed and reducing ROCE
Asset purchased with surplus cash and ROCE?
Has no effect on capital employed
Timing of purchase of assets and ROCE?
Capital employed increases if assets are purchased at year-end, no time to increase profits so ROCE falls
Asset held under revaluation model and ROCE?
Revaluation surplus increases capital employed, causing decrease in ROCE
Higher depreciation and ROCE?
Causes lower PBIT, causing ROCE to decrease
