Expert: Mike Wellman - 8/16/2007

Question
What does it mean for a company if their ROCE decreases from the previous year. Is this a good thing or a bad thing, what could have caused this decrease?

Answer
In general, a reduction in ROCE is a bad thing. One cause could be a reduction in net income which would, all other things being equal, is a bad thing. But there are many reasons that it could be lower.

Anything that causes the numerator (Earnings) to go up tends to increase ROCE -- which is good. Anything that cause the denominator to go down will cause ROCE to go up, but that could be good or bad.

If that is not clear, I can give you examples, but play with the numbers yourself by manipulating earnings, assets and liabilities to see what happens. Think of the things that cause each of the three variables to change. Of course the trick is - if one changes, another will too. Figure out what the good changes are and the bad changes.

As I said, if you need examples after you have played with it. Ask a follow up.

Good luck!