How do you calculate return on capital employed?

Prepare for the AAT Level 3 Financial Accounting Exam with comprehensive quizzes. Master the preparation of financial statements with detailed questions and explanations. Enhance your understanding and get set for success!

Return on Capital Employed (ROCE) is a financial metric used to assess a company's efficiency at generating profits from its capital. The formula for calculating ROCE is indeed (Profit / Capital employed) x 100.

This calculation involves dividing a company's profit by its capital employed (which typically includes total assets minus current liabilities) and then multiplying the result by 100 to express it as a percentage. A higher ROCE indicates more effective use of capital, as it shows that the business is generating more profit for every unit of capital employed.

The other options provided relate to different financial ratios and metrics that do not measure capital efficiency in the same manner. For instance, sales revenue relative to profit reflects profit margins rather than capital use efficiency. Similarly, total assets divided by equity indicates financial leverage, while gross profit relative to sales revenue measures profitability but does not address the efficient use of capital employed. Therefore, option A correctly reflects the method for calculating return on capital employed.

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