Return on Capital Employed - What is the meaning of Return??

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Piyush Sharma

Director

23 Points Posted on 27 May 2010

Return on Capital Employed = return/capital employed × 100
Where,
Return = Net Profit
± Non-trading adjustments (but not accrual adjustments for
amortization of preliminary expenses, goodwill, etc.)
+ Interest on long term debts + Provision for tax
– Interest/Dividend from non-trade investments
Capital Employed = Equity Share Capital
+ Reserve and Surplus
+ Pref. Share Capital
+ Debentures and other long term loan
– Misc. expenditure and losses
– Non-trade Investments.

Can anyone please tell me, what is meant by Non-trading Adjustments here and why accrual adjustments are not to be touched. Also in Capital Employed why Non Trade Investments have to be deducted?? This definition is given in the IPCC course material. Please help. Thanks in anticipation

Replies (3)

JITENDRA KUMAR DHINGRA

Executive

84 Points Posted on 28 May 2010

Here Non Trading Adjustment signifies that Which are not related to your Business.the effect of those transanction should be revert for getting profit req. for the above purpose.In simple terms, Profit=EBIT and Capital employed means Which is really invested in the Business therefore we should deduct Non trade Investment.

Piyush Sharma

Director

23 Points Posted on 28 May 2010

Thanks Jitendra.

But amortization of preliminary expenses and goodwill also, reduces the profit, and this reduction in profit is not justified when we are comparing our performance. Can u please elaborate on why amortization of goodwill and preliminary expenses should not be added back to reach at the correct amount of the profit. The reduction of profit on these two accounts, does not mean that our efficiency and performance has reduced. Kindly give me your views. Thanks again.