Name : Register Number: Marks: Attention: exam time: 110minutes Open-book examin
ID: 2603098 • Letter: N
Question
Name : Register Number: Marks: Attention: exam time: 110minutes Open-book examination and calculators ean be used. Show all your work, all the formulas. Marks will only be assigned for problems for which complete methodology, formulas, and the process is shown. Peeking, copying or duplicating others' work will be considered as "cheating" and such students will be asked to leave the examination room immediately. ROCE and EPS Calculation and Interpretation You are given the following data for Good Company Inc. for 2004, 2005, and 2006 (amounts in thousands) Net income Average number of common shares outstanding Average common shareholes' equity 2016 $445 135 $1231 2015 $402 134 S964 2014 S345 132 S735 Requierd: a. Calculate ROCE for the three years. b. Calculate basic EPS for the three years. c. Interpret your findings for both ROCE and EPSExplanation / Answer
Solution:
Part a and b --- Calculation of ROCE and Basic EPS
(Amount in thousands)
2016
2015
2014
a) Return on Capital Employed (ROCE)
Net Income
$445
$405
$345
Capital Employed (Average Common Shareholders' Equity)
$1,231
$964
$735
Return on Capital Employed (ROCE) = Net Income / Average Common Shareholders' Equity x 100
36.15%
42.01%
46.94%
b) Basic EPS
Net Income (i.e. Income available to common stockholders)
$445
$405
$345
Average number of common share outstanding
135
134
132
Basic EPS (Income available to common stockholders / Average number of common share outstanding)
$3.30
$3.02
$2.61
c)
ROCE --- Return on Capital Employed is a financial ratio and it measures company’s profitability and the efficiency in relation to the capital employed in the business.
It measures the ability of the business in generating profit by using the capital employed in the business.
ROCE depends upon two measures, Net Income or Income before interest and taxes and the Capital Employed in the business.
Higher ROCE describes that the company is using its capital employed efficiently to generate the Return i.e. Profit.
In Year 2014 the ROCE is highest 46.94% and thereafter it is reducing and in year 2016 it is lowest 36.15%. It describes that the company is unable or not much efficient to use its capital in generating the profit.
Basic EPS
It is the amount of the company’s profit or loss for a reporting period available to the common shareholders that are outstanding during the reporting period.
- Basic EPS measures the performance of the company
In Year 2016, Basic EPS is highest, it means the company is generating profit higher.
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
(Amount in thousands)
2016
2015
2014
a) Return on Capital Employed (ROCE)
Net Income
$445
$405
$345
Capital Employed (Average Common Shareholders' Equity)
$1,231
$964
$735
Return on Capital Employed (ROCE) = Net Income / Average Common Shareholders' Equity x 100
36.15%
42.01%
46.94%
b) Basic EPS
Net Income (i.e. Income available to common stockholders)
$445
$405
$345
Average number of common share outstanding
135
134
132
Basic EPS (Income available to common stockholders / Average number of common share outstanding)
$3.30
$3.02
$2.61
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