Overall Profitability Ratios:
It is also called “Return on investment” (ROI) or Return On Capital Employed (ROCE) it indicates the percentage of return on the total capital employed in the business. It is calculated on the basis of the following formula.
Operation Profit x 100
The term capital employed has been given different meanings by different accountants. Some of the popular meanings are as follows:
i) Sum-total of all assets whether fixed or current
ii) Sum-total of fixed assets
iii) Sum-total of long-term funds employed in the business, i.e.,
Share capital + Reserves & Surplus + Long Term loans + Non business assets + Fictitious assets.
In Management accounting, the term capital employed is generally used in the meaning given in the third point above.
The term “Operating profit” means “Profit before Interest & Tax.” The term “Interested” means “Interested on long term borrowing”. Interest on short – term borrowings will be deducted for computing operating profit. Non-term borrowing will be deducted for computing operating profit. Non-trading incomes such as interested on Government securities or non-trading losses or expenses such as loss on account of fire, etc., will also be excluded.
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