This illustrated glossary uses Visual Finance™ to provide a contextualized 'big picture' view of financial results. The examples feature data for the Round Number Company—a 'made-up company' with simplified figures. The Appendix presents an explanation of how to read Visual Finance as well as the financial statements and VF views for the Round Number Company.
Ratio: Operating Income as a percentage of Capital Employed.
Most definitions of ROCE use Operating Income or EBIT as the 'return', but the precise definition of Capital Employed can vary by company. There are multiple definitions for ‘capital employed’:
Example: The Round Number CompanyOperating Income = 30; Shareholder Equity = 140; Long-Term Debt = 100 Return on Capital Employed = 30/(140 + 100) = 30/240 = 12.5 % |
2. Calculation: Capital Employed = Total Assets - Intangible Assets - Current Liabilities
Goodwill is also an Intangible so it is included in the calculation.
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Operating Income = 30; Total Assets = 300; Intangibles = 8; Goodwill = 20; Current Liabilities = 36 Return on Capital Employed = 15/(300 - 8 - 20 - 36) = 30/236 = 12.7% |
3. Calculation: Capital Employed = Equity + Long-Term Liabilities
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Operating Income = 30; Shareholder Equity = 140; Long-Term Liabilities = 124 Return on Capital Employed = 30/(140 + 124) = 30/264 = 11.4 % |
4. Calculation: Capital Employed = Total Assets - Current Liabilities.
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Operating Income = 30; Total Assets = 300; Current Liabilities = 36 Return on Capital Employed = 30/(300 - 36) = 30/264 = 11.4 % |
5. Calculation: Capital Employed = Fixed Assets + Working Capital.
where Working Capital = Total Current Assets - Total Current Liabilities
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Operating Income = 30; Fixed Assets = 168; Current Assets = 132; Current Liabilities = 36 Working Capital = 132 - 36 = 96 Return on Capital Employed = 30/(168 + 96) = 30/264 = 11.4% |
6. Capital Employed = Total Assets - Current Liabilities - Cash and Cash Equivalents
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Operating Income = 30; Total Assets = 300; Current Liabilities = 36; Cash = 20 Return on Capital Employed = 30/(300 - 36 - 20 ) = 30/244 = 12.3% |
Definitions 3, 4, and 5 are different ways of expressing the same value. An ROCE calculation using one of these definitions is equivalent to Return on Net Assets (RONA).
The above is our generic explanations of common corporate financial terminology. Actual meanings can vary widely from company to company; in order to have the correct internal definition you need to ask your Finance Department, "What do you mean by that?"
term list.