Ratios: Profit Relative To Money Invested

Question 1

ROE

Answer 1

(Net profit after tax and interest + preference divs) / shareholders funds (or capital and reserves)

SHOWS returns relative to the equity in the business

Question 2

ROCE

Answer 2

Profit before interest and tax / capital employed

Capital employed = ordinary shareholder funds + long term debt

SHOWS gross profit in relation to the money being used to generate that profit

Question 3

Explain why ROE and ROCE are used to evaluates share’s returns (3)

Answer 3

• shows returns /profit
• on shareholders funds and capital
• and how efficiently it has performed

Question 4

Which is more useful ROCE or ROE when comparing w company to its competitors (3)

Answer 4

• ROCE
• because it takes into account all capital used
• including long term debt

Question 5

What is the formula for interest cover? (3)

Answer 5

• profit before interest and tax / gross interstate payable