REFS is
a mine of invaluable information for the private investor.
Selecting shares without its help is like trying to
clap with one hand tied behind your back.
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ROCE
(Return on capital employed)
This measures
the return achieved on invested and borrowed capital (the capital
employed). The return is therefore taken to be the pre-tax profit
earned before charging borrowing costs.
When calculating
ROCE, any intangible assets are deducted, i.e. the capital employed
is taken to exclude intangibles.
ROCE is calculated
as follows:
Step 1:
Calculate return
When
calculating return, the starting point is taken as the normalised
pre-tax profit, which is the reported FRS3 pre-tax profit after
excluding any exceptional and non-trading items. Thus
PRE-TAX PROFIT
(NORMALISED)
+ INTEREST
PAID
= RETURN
(Note:
In the event of the financial period being greater or less than
12 months in duration, the return is adjusted to an annualised
basis.)
Step 2:
Calculate capital employed
The capital
employed figure used in the calculation consists of the following
items from the balance sheet at the end of each period:
ORDINARY
CAPITAL
+ RESERVES
+ PREFERENCE
CAPITAL
+ MINORITY
INTERESTS
+ PROVISIONS
+ TOTAL BORROWINGS
- INTANGIBLES
= CAPITAL
EMPLOYED
Step 3:
Calculate ROCE
The calculation
is completed as follows:
RETURN (ANNUALISED)
-------------------------
X 100 = ROCE (%)
CAPITAL EMPLOYED
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