Hi everyone.
I've been trying to get my head around ROCE and there is a part in the textbook which I don't fully understand.
It says that a variation to ROCE is to include overdrafts and sets out the following:
If an overdraft is not included in the denominator, any interest payable on the overdraft should ideally be deducted from the numerator. Where an overdraft is included in the denominator, any interest payable on the overdraft should appear in the numerator.
I thought that:
- where overdraft IS NOT included, you need to include interest payable in the numerator (which would reduce the numerator by virtue of it being a negative number); and
- where overdraft IS included, you do not need to include interest payable in the numerator.
My reasoning, I think, is consistent with how the two ratios for ROCE are calculated in the first place (the second ratio excluded long-term debt but included the interest payable on it vis-a-vis the first ratio).
That said, I am happy to stand corrected if I'm wrong and I'm having trouble distinguishing between the words "deducted" and "appear" in the two sentences quoted above.
Thanks for any clarification.
Last edited by a moderator: Dec 21, 2016