Question 26.Q5: The following information for Hadrian is available.
The following information for Hadrian is available.
Hadrian purchased new non-current assets during the year.
Required
Calculate and comment on return on capital employed for Hadrian.
| $’000 | |
| Profit before interest and tax | 370 |
| Interest | 6 |
| Tax | 80 |
| Profit after tax | 284 |
| Share capital | 2,000 |
| Reserves | 314 |
| 2,314 | |
| Loan liability | 100 |
| 2,414 | |
| Industry average return on capital employed | 10% |
\text { ROCE }=\frac{\text { PBIT }}{\text { Capital employed }} \times 100 \%=\frac{370}{2,414} \times 100 \%=15 \%
Return on capital employed, at 15% is better than the industry average of 10%. There could be a number of reasons for this. It may be that the company is exceptionally profitable, or it may be that its assets are undervalued. The first explanation is more likely, since new assets have been purchased, by definition at market value.
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