Question

A company has a ROCE of 18.6%, an RNOA of 14.3%, and an ROOA of 9.3%. What is the contribution of the leverage effect (to one decimal place) of operating liabilities to the firm’s ROCE?

Answer 1

ROCE is Return on Capital Employeed

RNOA is Return on Net Operating assets

ROOA is Return on Operating Assets

ROCE = Return without Leverage + Effects of operating liabilities + Effects of financial liabilities

ROCE = ROOA + (RNOA - ROOA) + (ROCE - RNOA)

Therefore, effect of operating liabiliites on ROCE = (RNOA - ROOA)

Therefore, effect of operating liabiliites on ROCE = 14.30% - 9.30%

Therefore, effect of operating liabiliites on ROCE = 5.0%

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