This ratio explains the relationship between total profit earned by business and total investment made or total assets employed. It is expressed in percentage. This ratio is also known as "Return on Investment", or "Return on Total Resources". Purpose of this ratio is to measure overall profitability from the total funds made available by owners and leaders. To judge how efficient the business concern is in managing the funds at its disposal. This ratio is effective tools to measure overall managerial efficiency of business. Comparison of this ratio with other company and this information can be obtained for determining future course of action. This ratio indicates the productivity of capital employed and measures the operating efficiency of the business.
Formula:
Components:
1) Net profit before tax, interest & dividends (PBIT)
2) Capital employed calculation:
Capital employed =
I) Equity share capital
ii) Add. Preference share capital reserve & surplus
iii) Add. Long term borrowings (Term loan + Debentures)
iv) Less: Fictitious assets like miscellaneous expenses not written off.
v) Less profit & loss A/c Dr. Balance (loss)
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