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For Business Management Learners Across The Globe

 

PROFITABILITY RATIOS
RETURN ON CAPITAL EMPLOYED

Introduction



Return on capital employed compares the money invested in the business (capital employed) with net (trading) profit. It shows people who have invested in the business the percentage return made with their money.

What figures are used in the calculation?

Capital employed is made up of long term loans and money from the sale of shares (shareholder funds).

If you are taking figures from a balance sheet (to work out return on capital employed) use the assets employed figure if the capital employed figure is not provided. This is because on a balance sheet assets employed should equal capital employed (for more information about this click on balance sheet).   

Return on Capital Employed Calculation

The following calculation is used to work out the return on capital employed

.

Return on                    Net Profit
Capital             =          _________      x 100%
Employed
                                    Capital Employed

In the previous example we made £4000 net (operating) profit. Let’s imagine we invested £60 000 through shareholder funds and borrowed £40 000 of money through long term loans so that in total we employed £100 000 of capital. The following calculation would be used to work out the percentage return on the money we have put into the business.

Return on                    £4000
Capital             =          _________      x 100%
Employed
                                    £100 000

In our example the return on capital employed is 4% or to put it another way for every £100 put into the business, the business makes £4.

Conclusion

Investors in a business like to see a good return for their money so the higher the percentage figure (for return on capital employed) the better. If the figure is low investors may take their money out of the business, to invest somewhere else.



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