Return on Capital EmployedThe table given below shows P&G’s return on capital employed (RoCE) for Year 0 and Year 1.CompanyRoCE (Year 0)RoCE (Year 1)P&G India27.9%70%Which of the following could be the reason for the increase in P&G's RoCE from the previous year (Year 0) to the current year (Year 1)?Expansion in variable marginsIncrease in the employee benefit expenses of the companyAbility to get long-term loans at lower interest rates✕ IncorrectFeedback:Lower interest rates on loans would reduce the interest expense of the company. This would neither affect the EBIT nor the capital employed. Hence, the RoCE would not be affected by the change in interest rates.
Question
Return on Capital EmployedThe table given below shows P&G’s return on capital employed (RoCE) for Year 0 and Year 1.CompanyRoCE (Year 0)RoCE (Year 1)P&G India27.9%70%Which of the following could be the reason for the increase in P&G's RoCE from the previous year (Year 0) to the current year (Year 1)?Expansion in variable marginsIncrease in the employee benefit expenses of the companyAbility to get long-term loans at lower interest rates✕ IncorrectFeedback:Lower interest rates on loans would reduce the interest expense of the company. This would neither affect the EBIT nor the capital employed. Hence, the RoCE would not be affected by the change in interest rates.
Solution
The increase in P&G's RoCE from Year 0 to Year 1 could be due to an expansion in variable margins. This means that the company was able to increase its profits without a corresponding increase in capital employed. This could be achieved by increasing sales, reducing costs, or a combination of both.
An increase in the employee benefit expenses of the company would not lead to an increase in RoCE. In fact, it could potentially decrease RoCE if the increase in expenses is not accompanied by an increase in profits.
The ability to get long-term loans at lower interest rates would not directly affect RoCE. While lower interest rates would reduce the company's interest expense, this would not affect the EBIT (Earnings Before Interest and Taxes) or the capital employed, which are the two components of RoCE. Therefore, the change in interest rates would not affect RoCE.
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