EOCR ( return on capital` employed )
EOCR(资本回报率的使用)
This measures the relationship between profit , usually for the financial year, and the capital invested in the busine.
这一措施的利润之间的关系,通常的财政年度,资本投资业务。
For example, part of the balance sheet ofR Solly, a sole trader , showed:
例如,资产负债表的一部分所利,一个唯一的交易员,显示:
€€
Capital at 1 january year 980,000
资本在每年1月1日9
Profit for the year12,000
年利润
Drawings for the yearCapital a 31 December year 9Solly;s profit for the year enden 31 December year 9 was €12,000.Because he also drew €12,000 form the busine, no profits were retained in the busine.Therefore,the capital employed was €80,000 both at the commencement of the year and at the end of the year.His return on capital employed was therefore:
Profit foe the year/capital employed=0.15 or 15%
What does this mean?Fist, if Solly had not been in busine,the €80,000 could have been invested to earn a return.For example.Perhaps he could have invested the money to earn 10% per annum.This would have produced an income of €8,000.
The extra profit (€12,000 minus €8,000) of €4,000 is made by his busine.However, for the sole trader there is another is another consideration.
Sole traders often work in their in own busine.The reward to an employee who Works in the busine is a wage or salary.These would have been debited to theProfit and lo account for the year.If Solly, the owner, works in his own busine, his ‘wages’cannot go in the profit and lo account.Instead they must be treated as drawings.Therefore if SOlly could get a job somewhere for which his salary wouldBe €9,200 per annum for the same number of hours that he works in his busine, Then he would be €5,200 per annum better off by not having his busine.This is Arrived at as follows:
€
Profit from running his busine12,000
Income if he was not in busine:
Salary from employment9,200
Interest form €80,000 invested at 10%8,000
17,200
Difference5,200
But what if the figures on Solly’s balance sheet had been:
€€
Capital 1 January Year 980,000
Profit the year12,000
Drawings for the year10,0002,000
Capital 31 December year 982,000
You will see that Solly has not withdrawn all of the profit that he has made in the year ended 31 December Yare 9.So how do we calculate the return on capital employed?There is no doubt about the profit.It is €12,000.But what is the capital employed? There are three poibilities:
€
Capital employed at 1 January Year 980,000
Capital employed at 31 December Year 982,000
Average capital empioyed for the year81,000
The return on capital employed would 15%, 14.63% and 14.81%respectively.This debate will become more important to you when you approach your Third
LEVEL Accounting studies.For Second Level, it is enough to say that it is usual to calculate the profit made during a year as a percentage of the capital employed at the end that year.In this example, then, the usual answer would be 14.63%.
Measuring the return on capital employed is more difficult where the busineman Not only user his own money but borrows money as well.To illustrate the effect of this, suppose that as well as his own capital, Solly has a loan form his bank amounting to€18,000.He borrowed this at the beginning of Year 7,and will repay it at the end of Year 11.It carries a fixed interest rate of 9%.How does this affect the calculation of the return on capital employed?
The fist thing to note is that Solly would have paid€1,620 interest on the loan for the year, and this charge would have been debited to his profit and lo account.The profit and lo account would shoe:
€
Profit before interest charge13,620
Le interest on€18,000 loan at 9%1,620Net profit12,000
The capital employed is:
€
Owner’s capital at 31 December Year 982,000Borrowed capital18,000Total capital employed100,000
With these figures we can now calculate the returns on capital employed.These Are:
Return on total capital employed
€13,620/€100,000
=13.62%
