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00:07 welcome to taking the biz the A- level business Channel this video is all about the return on Capital employed ratio really useful ratio this for appraising the position of a business and for judging the performance of managers in the organization with this profitability ratio it really allows us to judge whether managers are effectively running the business so this ratio has a look at the the capital that's been employed into the organization and that's the funds that are raised from borrowing mortgages loans
00:36 debentures uh also money that's raised from shareholder investment and the money that might be raised from retained profits as well and the organization is going to take that pot that sum that war chest of money and it is going to invest it or employ it in the organization but it's only going to employ funds in the organization if it can earn all of that money back again plus profit on top no business wants to invest Capital without making more back than they've invested in the first place so what the roce tells us is
01:11 what that profit is as a percentage of that original sum of capital that we've employed in the organization so for example if a business raises 1 million P worth of capital deploys it into the organization it's going to want to make that one million pound back again plus profit on top so that the business makes a return rce is what that return is as a percentage of the amount of capital raised now when we're working out the rce obviously the larger the percentage the better we would like our rocce to be as high a
01:53 figure as we possibly can however when we're studying the rce it's important to try and treat it in context so if we had an roce of 20% for example whether that is an attractive figure or not to to the organization really depends on a couple of factors so it might depend on what Rivals R OES are as well or what the industry average rocce is and if our figure of 20% compares favorably to what rivals or the industry averages happy days if our RC actually looks quite tepid compared to what rivals in the same industry
02:31 under the same market conditions have been able to achieve it makes our figure a little bit more questionable and one thing that we can really try and use the rsse for is to see how it's developed over time so our figure of 20% might seem a little bit disappointing compared to Rivals but if that's an improvement on last year's figure of just 12% then at least we can see that the organization is improving so we really should look out for in case studies and exams any hints that the rocce has changed over time if of
03:02 course the ROC is quite high but is declining then again that is just something that might raise question marks about the management of the business why is it that their returns this year aren't as high as they've been in previous years now there's a couple of things with the RSU we might just want to watch out for just to see whether the business has done anything that might artificially have affected it rocce and perhaps inflated it beyond the level that's a really true reflection of the management of the
03:36 organization so the first of those is whether the business has bolstered its operating profit through a one-off sale perhaps of an asset that the organization no longer requires and that's what we refer to as quite a poor quality profit poor quality because it's something that can't be replicated so selling off an old factory or some other property might artificially boost our operating profit for a year th increasing our return on Capital employed but we can't Bank on having to sell off property every year to boost
04:10 our our business's profit figures so this is something that might make the ROC seem artificially High compared to its natural level and again if you do get access to financial information in your case studies in your exams it's just one thing that you might be able to look out for the other thing we could perhaps try and spot spot as we're reading case studies is whether the organization is leasing a lot of its assets so if the organization rather than buying assets especially very expensive ones like property it's
04:42 leasing them instead then again this means that the capital employed into the organization isn't going to be as great as it would be for a firm that's actually purchased those assets he's going to own them out right so it might be that a firm has a slightly higher rocce than Rivals because this is a firm relies quite heavily on leasing its long-term fixed assets rather than purchasing them thus meaning that its profits compared to its capital employed figure might be slightly higher so there's the ROC for you it's
05:11 really important to compare this figure to something to really put it in context we're really looking out for whether it's rising or declining over time and whether it compares favorably to Rivals figures or industry averages in the meantime keep on taking the biz good luck with your ratio revision see r