Which statement about capital employed in the ROCE calculation is correct?

• A. It equals shareholder funds plus long-term debt
• B. It equals total assets minus current liabilities
• C. It equals equity plus retained earnings
• D. It equals net assets minus intangible assets

Answer: (A)

Capital employed in ROCE represents the long-term financing used to run the business. It is the permanent pool of funds available for operations, typically the funds provided by owners and by lenders over the long term. That’s why it is defined as shareholder funds (equity and reserves) plus long-term debt. This base excludes current liabilities because they are short-term, used for day-to-day working capital, and not part of the long-term financing that supports earning capacity.

So, the sum of equity (shareholder funds) and long-term debt gives the appropriate capital base for ROCE. Equity alone misses the debt financing, and other formulations that subtract current liabilities or exclude debt don’t align with how the permanent capital base is measured for this ratio.