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Efficiency Indicators
Capital Employed
Capital Employed is also sometimes referred to as Funds Employed. It is basically the total of a company’s Business Assets (excluding its Cash holdings) less its Trade-related Liabilities.
CAPITAL EMPLOYED = NET ASSETS - CASH + BORROWINGS
Example: Petronas Dagangan Bhd
PETDAG’s Consolidated Balance Sheet for 2006 and 2007 were reported as follows:
| (RM millions) |
31-Mar-06 |
31-Mar-07 |
| Cash |
466 |
544 |
| Property Plant & Equipment |
2840.4 |
3086.9 |
| Inventories |
605.5 |
477.7 |
| Trade & Other Receivables |
1968.9 |
2,097 |
| Long-term Receivables |
247.6 |
281.8 |
| Investment in Associates |
3.7 |
4.6 |
| Goodwill |
26.3 |
24.9 |
|
| Total Assets |
6158.4 |
6516.9 |
| |
| Trade & Other Receivables |
2865.8 |
2745.1 |
| Tax Provision |
91.9 |
121.0 |
| Borrowings |
15.3 |
5.3 |
| Deferred Tax |
93.7 |
102.6 |
|
| Total Liabilities |
3066.7 |
2974.0 |
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| Net Assets |
3091.7 |
3542.9 |
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Capital Employed for 2006 = 3091.7 + 15.3 – 466 = RM 2,641.0 million
Capital Employed for 2007 = 3542.9 + 5.3 – 544 = RM 3,004.2 million
Return on Capital Employed (ROCE)
ROCE is a good indicator was to how well a company’s management is using its business assets to generate earnings.
ROCE = EBIT / Average Capital Employed
(Where EBIT is the Earnings Before Interest and Tax. See explanation here)
Example: Petronas Dagangan Bhd
PETDAG’s earnings for the year ending 31-Mar-07 were reported as follows:
| Profit Before Tax |
726.2 |
| Less Interest Income: |
(15.9) |
| Add Interest Expense |
(0.9) |
| EBIT |
711.2 |
|
As per the above, its Average Capital Employed
(2641+3004.2) / 2= RM2,822.6 million
ROCE = 711.2 / 2822.6 = 25.2%
This means that the company is achieving a return of 25.2% on its business assets
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