Accounting – 6.1 Calculation and understanding of accounting ratios | e-Consult
6.1 Calculation and understanding of accounting ratios (1 questions)
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Significance of ROCE:
Return on Capital Employed (ROCE) is a key performance indicator (KPI) that assesses how effectively a company is using its capital to generate profit. It's significant for several reasons:
- Efficiency of Capital Use: ROCE indicates how well a company is deploying its invested capital (capital employed) to generate profits. A higher ROCE suggests greater efficiency.
- Profitability Indicator: ROCE provides a clear measure of profitability relative to the capital invested. It helps investors and stakeholders understand the return they are getting on their investment in the company.
- Comparison Tool: ROCE allows for comparison with other companies within the same industry. A higher ROCE than competitors suggests a competitive advantage in capital utilization.
- Investment Decisions: Investors often use ROCE to evaluate whether a company is a good investment. A consistently high ROCE is generally viewed positively.