ROCE Lower than Borrowing Rate

Return on Capital Employed
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Samir
Can anyone please break down for me how shareholders earnings will be reduced if ROCE is lower than the borrowing rate? (...) Read more? Sign up for free

  Subhaschandra Shenoy
 

Why ROCE Should not Be Lower Than Borrowing Rate?

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
 

ROCE

The explanation as to the inverse proportional relationship of ROCE and borrowing rate is not clear.

 

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