Question

How will you measure the profitability of a business in terms of Capital employed?

Answer 1

The ‘Return on Investment’ or R.O.I. ratio is used to determine the profitability of a business in terms of the capital employed. It is determined by comparing the profit earned and the capital used to generate it. The term ‘Investment’ in this context denotes the placement of long-term funds within the enterprise. As previously mentioned, long-term funds are also referred to as capital employed, which encompasses the sum of long-term loans and shareholders’ funds. This ratio is computed as under:

`"Return on Investment"="Profit before Interest, Tax and Dividends"/"Capital Employed"xx100`