ROCE Lower than Borrowing Rate


Return on Capital Employed

ROCE Lower than Borrowing Rate

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Samir, UK
Can anyone please break down for me how shareholders earnings will be reduced if ROCE is lower than the borrowing rate?

Why ROCE Should not Be Lower Than Borrowing Rate?
Subhaschandra Shenoy, Other, India
As you know ROCE = Operating Profit (EBIT) / Equity Shareholders Fund.
As the EBIT reduces, the % of ROCE will be reduced. Hence the minimum ROCE acceptable by shareholders will be just above the current borrowing rate or bank interest.
The shareholder will lose money, if the ROCE is negative or reduced below borrowing rate.
Therefore the ROCE should be 15% to as high as 28% in automotive industry.
muton, Accountant, Cameroon
The explanation as to the inverse proportional relationship of ROCE and borrowing rate is not clear.
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