PI's: Return on Capital Employed
Regulator for Social Housing: Return on Capital Employed
RSH 401: Return on Capital Employed (ROCE) %
Rationale, Definition & Worked Example
Below you can find information regarding the rationale, definition and formula for this performance indicator. This includes a worked example to demonstrate how this indicator should be calculated.
Rationale
This metric compares the operating surplus to total assets less current liabilities and is a common measure in the commercial sector to assess the efficient investment of capital resources.
Shows how well a provider is using both its capital and debt to generate a financial return. It is a commonly used ratio to compare the efficiency of capital usage of different businesses in the same sector. It should also be recognised that this measure only considers financial return. Narrative could link this measure to indicators of social return.
Caution should be applied when comparing different providers, as recent stock transfers may result in a lower ROCE as there has been less time in which to depreciate the asset base. The accounting policy applied to housing properties will also impact ROCE, with properties held at valuation or deemed cost resulting in a lower ROCE than those held at historic cost. It would also be possible to deliver an improvement due to increasing depreciation unless assets are constantly refreshed by capital spend. In order to demonstrate the effectiveness of the asset management policy, this should be considered together with recent levels of repairs and maintenance spend.
Shows how well a provider is using both its capital and debt to generate a financial return. It is a commonly used ratio to compare the efficiency of capital usage of different businesses in the same sector. It should also be recognised that this measure only considers financial return. Narrative could link this measure to indicators of social return.
Caution should be applied when comparing different providers, as recent stock transfers may result in a lower ROCE as there has been less time in which to depreciate the asset base. The accounting policy applied to housing properties will also impact ROCE, with properties held at valuation or deemed cost resulting in a lower ROCE than those held at historic cost. It would also be possible to deliver an improvement due to increasing depreciation unless assets are constantly refreshed by capital spend. In order to demonstrate the effectiveness of the asset management policy, this should be considered together with recent levels of repairs and maintenance spend.
Definition
Gain/loss on disposal of property, plant and equipment is not included in operating surplus. Similarly, results of JVs are not included in either turnover or operating surplus. However these results are included in this measure as they can be considered to form part of the return on the capital investment in either fixed assets or joint ventures.
Formula
ROCE = (A / B) x 100
A = Return [Operating surplus / (deficit) (overall) including gain / (loss) on disposal of fixed assets (housing properties) + Share of operating surplus/(deficit) in joint ventures or associates]
B = Capital employed [Total fixed assets + Total current assets- Current liabilities]
NB. Gain / (loss) on disposal of fixed assets (housing properties) is not usually included in operating surplus. Similarly, results of JVs are not usually included in either turnover or operating surplus. However, these results are included in this measure as they can be considered to form part of the return on the capital investment in either fixed assets or joint ventures.
A = Return [Operating surplus / (deficit) (overall) including gain / (loss) on disposal of fixed assets (housing properties) + Share of operating surplus/(deficit) in joint ventures or associates]
B = Capital employed [Total fixed assets + Total current assets- Current liabilities]
NB. Gain / (loss) on disposal of fixed assets (housing properties) is not usually included in operating surplus. Similarly, results of JVs are not usually included in either turnover or operating surplus. However, these results are included in this measure as they can be considered to form part of the return on the capital investment in either fixed assets or joint ventures.
Worked Example
Operating surplus (including disposals and JVs) = £3,000,000
Total fixed assets = £200,000,000
Total current assets = £20,000,000
Current liabilities = £30,000,000
Capital employed = £200,000,000 + £20,000,000 − £30,000,000 = £190,000,000
Calculation:
£3,000,000 ÷ £190,000,000 × 100 = 1.58%