Page 66 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 4: Ratio Analysis

Notes
!
Caution Standard norm of the ratio: Higher the ratio illustrates that the fi rm has greater

effectiveness in the utilization of assets, means greater profits reaped by the total assets
and vice versa.
4.5.5 Return on Capital Employed

The ratio illustrates that how much return is earned in the form of Net profit after taxes out of the

total capital employed. The capital employed is nothing but the combination of both non current
liabilities and owners’ equity. The ratio expresses the relationship in between the total earnings
after taxation and the total volume of capital employed.

Return on Total Capital Employed = Net Pr ofit After Taxes × 100
Total Capital Employed

!

Caution Standard norm of the ratio: Higher the ratio is better the utilization of the long
term funds raised under the capital structure means that greater profits are earned out of

the total capital employed.

Example: In the previous example, if the total capital employed is worth ` 25,00,000,
what is the return on total capital employed?

Solution:
Net Pr ofit After Taxes , 5 00 ,000
Return on Total Capital Employed = × 100 = × 100 = 20%
,
Total Capital Employed 2 25 00 000
,
Solved Problems for Practice

1. The following figure relates to Poornima Traders Ltd. for the year ended 31st March,
2005.

Treading and Profit & Loss Account
for the year ended 31st March, 2005
Poornima Traders Ltd.
Dr Cr
Particulars ` ` Particulars ` `
To Opening stock 1,50,000 By Sales 10,40,000
To Purchases 6,50,000 Less: Returns 40,000
To Gross profi t c/d 4,00,000 10,00,000
By Closing stock 2,00,000
12,00,000 12,00,000
To Administration 80,000 By Gross profi t b/d 4,00,000
To Selling &Distribution 50,000 By Dividend income 18,000
1,30,000 By Profit on sale of share 22,000

To Loss on sale of assets 10,000 40,000
To Net profi t c/d 3,00,000
4,40,000 4,40,000

LOVELY PROFESSIONAL UNIVERSITY 61