A question just came in relating to my ratio analysis work hosted by Biz/ed. Here's the question and my response follows: From Mark: I believe there's an error on page: http://www.bized.ac.uk/compfact/ratios/ror3.htm where it says: Did you notice that we use the Equity Shareholders' Funds instead of Capital Employed? In fact, they are different names for the same thing! We could call the ratio the Return on Shareholders' Funds (ROSF) just as easily if we wanted; but generations of accountants and students only know it as ROCE. Isn't it true that Capital Employed is shareholders funds plus long-term liabilities, so that ROCE = ROSF only if a firm has no debt, no gearing, and is 100% equity financed? My reply: There is always a worry when one discusses capital employed and for years now I have tended to solve the problem by giving a very general definition of it, such as the one that Mark has pointed out. For A level, 1st year undergraduate and foundation professional accounting work I think the general definition is fine. For higher level work, 2nd year undergraduate and upwards, I would have no hesitation in defining capital employed much more tightly: maybe this is Mark's problem as he seems to be a university student or lecturer. Just to try to prove my point and to reassure Mark and all Biz/ed visitors, I took a look at three definitions of CE from three books that I often use. Here is what I found: 1. A company's capital employed is shown by taking the figure for total assets from the balance sheet. 2. Capital Employed. A measure of the total value of the operating assets of an equity. different measurements are appropriate for different purposes. In some cases, owners’ equity is the appropriate measurement: in an incorporated company, this will be called ‘shareholders’ capital employed’. In some cases, long term borrowings may be added to owners’ equity, while in others dividends payable by the entity and taxation payable by it may be added. 3. Capital employed (in trading) = Share Capital + reserves + all borrowings including obligations under finance leases, bank overdraft + minority interests + provisions – associates and investments. Government Grants are not included. 4. Capital employed (overall) Associates and investments are not deducted, while the overall profit figure includes income from investments and the company’s share of the profits of associated companies, in addition to trading profit. Sources 1 John Ellis and David Williams Corporate Strategy and Financial Analysis Pitman Publishing 2 Derek French Dictionary of Accounting Terms Financial Training 3 and 4 Geoffrey Holmes and Alan Sugden Interpreting Company Reports and Accounts Prentice Hall It wouldn’t be a problem for me to add the above to the page that Mark refers to and I could revise it a bit to make it fit more seamlessly if you wish. Let me know! Otherwise, I hope Mark has found that section to be useful and I am grateful for the opportunity of discussing this issue with both of you. DW