ACCA Performance Management (F5) Certification Practice Exam

How is return on capital employed (ROCE) calculated?

1. Operating profit (net profit) / Capital employed x 100

2. Gross profit / Capital employed x 100

3. Net profit / Total assets x 100

4. Operating expenses / Turnover x 100

The correct answer is: Operating profit (net profit) / Capital employed x 100

Return on capital employed (ROCE) is a key financial metric used to assess a company's efficiency in generating profits relative to its capital employed. It indicates how well a company is utilizing its capital to produce earnings. The calculation of ROCE is based on operating profit (also known as net operating profit) divided by capital employed, and the result is expressed as a percentage. Capital employed generally refers to the total amount of capital used for the acquisition of profits, often represented by total assets minus current liabilities. By using operating profit in the calculation, the formula focuses on the profit generated from core business operations rather than other income or expenses. This provides a clearer picture of the company's operational efficiency and financial health concerning its capital base. The option that correctly states this relationship as operating profit divided by capital employed multiplied by 100 accurately reflects how ROCE is meant to be calculated, reinforcing the importance of operating results in evaluating a company’s performance relative to the capital it has invested.