Sample Essay

Return on Capital employed ROCE is the post-tax version of the earning power. It considers the effect of taxation, but not the capital structure. It is internally consistent.

Its merit is that it is defined in such a way that it can be compared directly with the post-tax weighted average cost of capital of the firm. It is regarded as a very important measure because it reflects the productivity of the ownership (or risk) capital employed in the firm. It is influenced by several factors—earning power, debt-equity ratio, average cost of debt funds, and the tax rate. In judging all the profitability measures it should be borne in mind that the historical valuation of assets imparts an upward bias to profitability measures during an inflationary period. Tesco’s ROCE for 2005 was 0.10%, 0.11% in 2006, 0.12% in 2007, 0.11% in 2008 and 0.08% in 2009. This growing trend shows the company has had a good ROCE but it has decreased in 2009. The return on equity measures the profitability of equity funds invested in the firm. This ratio is less and it means the capital employed or invested is at a risk but the effect of other ratios mentioned above will also be included in the overall effect so investors must not rely on this ratio alone to decide. The other ratios give us a good picture

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Essay: Return on Capital employed Ratio at Tesco Plc
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