Do You Know What ROCE Means
ROCE is:
Return On Capital Employed.
It is a very important number. It is every business person’s key statistic to see if their money is working hard for them.
It is calculated as:
Profit divided by money invested. It is then expressed as a percentage.
And the idea is to make this figure as large as possible.
So if you made a profit of £10,000 and you invested £5,000 then your ROCE would be:
£10,000 divided by £5,000 = 200%.
If you were to apply this to property and lets say you invested £10,000 and bought a property and then sold it on at a profit and after clearing all mortgages, cost and tax you netted £30,000 then your ROCE would be:
£30,000 divided by £10,000 = 300%.
Now you can directly compare this percentage with what you would get from a bank. Now lets say you did actually buy that property, invested £10k and got back £30k after tax and you did this in 1 year then your effective return would be 300%.
If you invested £10k in a high street bank you would get 0.1% for a year and once you deduct the tax you would get a return of 0.06% if you were a higher rate tax payer.
So lets compare:
Invest in property 300%
Leave money in bank 0.06%
So if you invest in property you could get a return 5,000 times greater than leaving it in the bank. However this is only true if the following holds:
Property prices rise back to 2007 levels.
Now I do not know when that will happen. It might happen this year, next year or the year 2020. who knows. However I pose you this:
To get a 300% return from leaving it in the bank will take you 5,000 years! So can you wait till the year 7009?
So if you do want a 300% return you have to ask yourself when will 2007 prices return? One thing you can be sure of is that 2007 prices will return. Prices ALWAYS recover simply because prices always rise.
When prices do recover you know that whoever invested in 2008, 2009 and beyond would have made a fortune.
So are you leaving your money in the bank or investing in property?
Article Courtesy of Ajay Ahuja
