A firm has Operating Profit (EBIT) of Rs. 120 crore, Net Profit After Tax (PAT) of Rs. 70 crore, Average Total Net-Worth (Equity) of Rs. 350 crore, and Average Total Capital Employed (Debt + Equity) of Rs. 600 crore. What are the company's Return on Equity (ROE) and Return on Capital Employed (ROCE)?

[ A ]ROE = 34.28%; ROCE = 11.67%

[ B ]ROE = 20.00% (70 / 350); ROCE = 20.00% (120 / 600)[ CORRECT ]

[ C ]ROE = 10.00%; ROCE = 50.00%

[ D ]ROE = 58.33%; ROCE = 20.00%

Takeaway

Option B is correct: ROE = 20.00% (70 / 350); ROCE = 20.00% (120 / 600)

Derivation

Return on Equity (ROE) measures profitability on shareholders' book capital: ROE = Net Profit After Tax (PAT) / Average Net-Worth = Rs. 70 crore / Rs. 350 crore = 0.20 or 20.00%. Return on Capital Employed (ROCE) measures operating efficiency on total capital deployed across both equity and debt providers: ROCE = Operating Profit (EBIT) / Average Capital Employed = Rs. 120 crore / Rs. 600 crore = 0.20 or 20.00%. Both ratios reflect high capital productivity. This question tests the mathematical calculation of fundamental return ratios. The common error is dividing PAT by total capital employed.

Why the others fail

A — ROE = 34.28%; ROCE = 11.67%

ROE of 34.28% incorrectly uses EBIT (120 / 350) in the numerator instead of PAT (70), and ROCE of 11.67% incorrectly uses PAT (70 / 600).

C — ROE = 10.00%; ROCE = 50.00%

ROE of 10.00% and ROCE of 50.00% are arbitrary figures resulting from severe formula and denominator confusion.

D — ROE = 58.33%; ROCE = 20.00%

58.33% results from dividing PAT by total capital employed (70 / 600 = 11.67%) and inverting calculations.