Advantages and disadvantages of ROCE

Answer 1

Advantages:

1. Focus on profit
2. objective to cost and profit
3. readily available data
4. appropriate for short term decision making
5. comparative measure of performance. it can be used to compare performance with other divisions and companies
6. comparison is fair to divisions with different sizes of investment
7. managers accept projects with high ROCE

Disadvantages:

1. Historic measure
2. Projects which have slow payoffs may be rejected
3. May focus on short term achievements, so not fit for long term performance measuring
4. Does not encourage investment as it lowers ROCE which leads to dysfunctional decision making
5. It is measured against the NBV of the assets of the business. These assets are depreciated, ROCE will increase despite of the face that the cash flow has remained the same
6. All items in the formula may not be controllable by the responsible manager
7. Cannot be adjusted to reflect different risk involved in different divisions or investments
8. ROCE can be calculated using different profit figures such as PBT, PAT etc making comparison difficult and results manipulative
9. Produces narrow focus on divisional profitability at the expense of the profitability of the overall firm