Question

From the following information, calculate 'Return on Investment (ROI)' :

Net Profit after Interest and Tax Rs 7,00,000; Current Assets Rs 6,00,000; Current Liabilities Rs 2,00,000; Tax Rate 30%; Non-Current Assets Rs 21,00,000; and 10% Long-term Debt Rs 20,00,000.

Hint:

Add back tax (Rs. 3,00,000) and interest (Rs. 2,00,000) to the net profit to get PBIT of Rs. 12,00,000. Capital employed = Rs. 21,00,000 + Rs. 6,00,000 - Rs. 2,00,000 = Rs. 25,00,000, so ROI = 48%.

Answer 1

Step 1: Understand what ROI measures:
Return on Investment shows how much profit the business earns on the long-term funds used in it.
It is worked out on profit before interest and tax, because interest and tax are paid after the funds have earned that profit.
Formula: ROI = (Profit before Interest and Tax / Capital Employed) x 100.

Step 2: Find the tax from the net profit:
Net profit after interest and tax is Rs. 7,00,000 and the tax rate is 30%.
So Rs. 7,00,000 is 70% of the profit before tax.
Profit before tax = Rs. 7,00,000 x 100 / 70 = Rs. 10,00,000.
Tax = 30% of Rs. 10,00,000 = Rs. 3,00,000.

Step 3: Find the interest on long-term debt:
Long-term debt is Rs. 20,00,000 and it carries 10% interest.
Interest = 10% of Rs. 20,00,000 = Rs. 2,00,000.

Step 4: Find Profit before Interest and Tax:
Add back the tax and the interest to the net profit after interest and tax.

Particulars	Rs.
Net Profit after Interest and Tax	7,00,000
Add: Tax	3,00,000
Add: Interest on Long-term Debt	2,00,000
Profit before Interest and Tax	12,00,000

Step 5: Find Capital Employed:
Capital Employed = Non-Current Assets + Current Assets - Current Liabilities.
Capital Employed = Rs. 21,00,000 + Rs. 6,00,000 - Rs. 2,00,000 = Rs. 25,00,000.

Step 6: Calculate ROI:
ROI = Rs. 12,00,000 / Rs. 25,00,000 x 100 = 48%.

Final Answer:
Profit before Interest and Tax is Rs. 12,00,000 and Capital Employed is Rs. 25,00,000.
Return on Investment = 48%.