Question

In calculating ROCE, suppose I am finding it using net operating assets and financial obligations then if financial obligations are smaller than financial assets then how am I supposed to net them against financial assets because in finding leverage and spread, we are supposed to use financial obligations. So here should I net the obligations? And if yes then what should I use for finding leverage? Only fin obligations or netted fin assets?

Answer 1

I think there is a small issue in the use of components in the ratio. ROCE requires two things - one is EBITDA (which is your numerator), and the second part is Fixed Capital Employed (liabilities). The liabilities (denominator) consists of fixed (outside liabilities) as well as equity. (formula is EBITDA divided by Capita Employed - (equity and debt).
Second Method
Some people use a different caluclation for denominator which is Total Assets - Current Liabilities which is equal to Total Liabilities - Current Liabilities which is Fixed Liabilities or Capital Employed. The second method is mathematically similar to the first, but confusing, so I would prefer the first method. Remember the denominator talks only about liabilities/capital employed only - so dont confuse it with assets.
Hop this clarifies your doubt. Please dont use "net operating assets" - I'm not sure it has relevance w.r.to ROCE. Just in case I'm missing something please feel free to correct or clarify.