Why does return on capital employed decrease

The arithmetic average of total assets a company holds analyses how much returns a company is producing on the total investment made. It is calculated as the net income divided by the shareholders equity. ROE signifies the efficiency in which the company is using assets to make profit. Free Investment Banking Course. Login details for this Free course will be emailed to you. Forgot Password?

Free Ratio Analysis Course. Article by Sayantan Mukhopadhyay. Comments Hi Vaidya- Could you correct the numbers in the first section of this blog? Please select the batch. Cookies help us provide, protect and improve our products and services. This ratio is also suitable to assess the entity or investment project that have different tax and interest perspective as it uses only Earning Before Interest and tax.

For example, the group companies may have different projects with different sizes of invested capital as well as the different tax rates. This ratio allows the group company to assess the performance by using this ratio since the tax charged as well as interest expenses are excluded from the calculation.

The main disadvantage of ROCE is that this ratio is using information from historical financial data and it could be manipulated by smart CEO. As we all know, this ratio is used to assess the performance of the company or project and more importance to assess the performance of the management team.

While using this ratio to assess the performance, management could manipulate this ratio by using the accounting techniques or by not investing in new assets. Why management not willing to invest in the new assets if ROCE is used as performance measurement?

Well, investing in new assets leads to an increase in assets value as well as depreciation. This will subsequently decrease profit before interest and tax as well as ROCE. Why would return on capital employed decreased?

What does return on capital employed tell you? What does ROCE indicate? What is the difference between return on capital and return of capital? How do you interpret return on capital? What is a good ROE for stocks? What is a bad Roe? What is a good ROE for a bank? How can a bank increase ROE? With ROCE, the higher the percentage figure, the better. It is also important to ensure that the operating profit figure used for the top half of the calculation does not include any exceptional items which might distort the ROCE percentage and comparisons over time.

Company Reg no: VAT reg no Main menu.