TechNova Pvt. Ltd. posted a profit before interest and tax (PBIT) of Rs.80,000 in the last financial year. Its total assets were Rs.1,20,000, total liabilities were Rs.40,000, and current liabilities were Rs.20,000. Interest expense for the year was Rs.20,000. Calculate (a) Return on Capital Employed (ROCE) as a percentage rounded to one decimal place, and (b) Interest Coverage Ratio.
Answer
80.0%, 4.0
The correct answer is 80.0%, 4.0 — Interpretation: a ROCE of 80.0% shows high profitability of capital employed; an interest coverage ratio of 4.0 indicates strong ability to meet interest obligations.
Step-by-step solution
- Identify PBIT: Rs.80,000.
- Identify total assets: Rs.1,20,000 and current liabilities: Rs.20,000.
- Compute capital employed = total assets – current liabilities = 1,20,000 – 20,000 = 1,00,000.
- Apply ROCE formula: PBIT ÷ capital employed = 80,000 ÷ 100,000 = 0.8 → 80.0% (rounded).
- Identify interest expense: Rs.20,000.
- Apply interest coverage ratio formula: PBIT ÷ interest expense = 80,000 ÷ 20,000 = 4.0.
- Interpretation: a ROCE of 80.0% shows high profitability of capital employed; an interest coverage ratio of 4.0 indicates strong ability to meet interest obligations.
Common mistake: Using total assets instead of capital employed in ROCE or misapplying the interest coverage formula
Concept tested: Profitability & solvency ratios
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