ACCA Financial Management (F9) Certification Practice Exam

What does ROCE stand for in financial performance analysis?

1. Return on Capital Employed

2. Rate of Capital Expenditure

3. Ration of Operating Capital Efficiency

4. Return on Common Equity

The correct answer is: Return on Capital Employed

ROCE stands for Return on Capital Employed. It is a key financial metric used to evaluate the efficiency and profitability of a company in relation to the capital that has been employed in its operations. The calculation of ROCE involves dividing the operating profit by the total capital employed, which typically includes both equity and debt. This measure is significant because it provides insights into how well a company is utilizing its capital to generate earnings before interest and taxes. Investors and analysts often use ROCE as a comparative measure, assessing how effectively different companies are managing their capital investments. In contrast, the other options present different concepts. Rate of Capital Expenditure pertains to the percentage of capital that a company invests in fixed assets over a particular period. Ratio of Operating Capital Efficiency is not a commonly recognized financial metric, and Return on Common Equity specifically measures the profitability available to common shareholders without considering debt. Thus, Return on Capital Employed is the most relevant and widely recognized term used in performance analysis.