Question

Net Profit after interest but before tax ₹ 1,40,000; 15% Long-term Debts ₹ 4,00,000; Shareholders’Funds ₹ 2,40,000; Tax Rate 50%. Calculate Return on Capital Employed.

Answer 1

Calculation of Capital Employed:

Using the Liabilities side approach:

\[\text{Capital Employed} = \text{Shareholders’ Funds} + \text{Long-term Debts}\]

$$\text{Capital Employed} = ₹ 2,40,000 + ₹ 4,00,000$$

$${\text{Capital Employed} = ₹ 6,40,000}$$

Calculation of Net Profit before Interest and Tax:

Calculation of annual interest expense:

$$\text{Interest on Long-term Debts} = 15\% \text{ of } ₹ 4,00,000$$

$$\text{Interest} = ₹ 4,00,000 \times \frac{15}{100} = ₹ 60,000$$

Now, add interest back to the profit before tax:

$$\text{Net Profit before Interest and Tax (EBIT)} = \text{Net Profit after Interest but before Tax} + \text{Interest}$$

$$ = ₹ 1,40,000 + ₹ 60,000$$

$$ = ₹ 2,00,000$$

Calculation of Return on Capital Employed (ROCE):

$$\text{Return on Capital Employed} = \left( \frac{\text{Net Profit before Interest and Tax (EBIT)}}{\text{Capital Employed}} \right) \times 100$$

$$\text{Return on Capital Employed} = \left( \frac{2,00,000}{6,40,000} \right) \times 100 = 31.25\%$$

Return on Capital Employed = 31.25%