RETURN ON CAPITAL EMPLOYED Definition

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RETURN ON CAPITAL EMPLOYED (ROCE) is a measure of how effectively the company is using its capital. The formula to measures the return on all the assets the company is using: Profit before interest and tax (PBIT) / (total assets - current liabilities)

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CONTINGENT WORKERS is a provisional group of workers who work for an organization on a non-permanent basis, also known as freelancers, independent professionals, temporary contract workers, independent contractors or consultants.

DEBT RATIO measures the percent of total funds provided by creditors. Debt includes both current liabilities and long-term debt. Creditors prefer low debt ratios because the lower the ratio, the greater the cushion against creditors losses in liquidation. Owners may seek high debt ratios, either to magnify earnings or because selling new stock would mean giving up control. Owners want control while "using someone elses money." Debt Ratio is best compared to industry data to determine if a company is possibly over or under leveraged. The right level of debt for a business depends on many factors. Some advantages of higher debt levels are:

  • The deductibility of interest from business expenses can provide tax advantages.
  • Returns on equity can be higher.
  • Debt can provide a suitable source of capital to start or expand a business.

Some disadvantages can be:

  • Sufficient cash flow is required to service a higher debt load.
  • The need for this cash flow can place pressure on a business if income streams are erratic.
  • Susceptibility to interest rate increases.
  • Directing cash flow to service debt may starve expenditure in other areas such as development which can be detrimental to overall survival of the business.

 Formula: Total Liabilities / (Total Liabilities + Stockholders Equity)

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