Financial Terms return on capital

# Definition of return on capital

## return on capital

income; it is equal to the rate of return multiplied by the amount of the investment

# Related Terms:

## Return on capital employed (ROCE)

The operating profit before interest and tax as a percentage of the total shareholders’ funds plus
the long-term debt of the business.

## return of capital

the recovery of the original investment (or principal) in a project

## capital recovery

Refers to recouping, or regaining, invested capital over
the life of an investment. The pattern of period-by-period capital recovery
is very important. In brief, capital recovery is the return of capital
not the return on capital, which refers to the rate of earnings on the
amount of capital invested during the period. The returns from an
investment have to be sufficient to provide for both recovery of capital
and an adequate rate of earnings on unrecovered capital period by
period. Sorting out how much capital is recovered each period is relatively
easy if you use a spreadsheet model for capital investment analysis.
In contrast, using a mathematical method of analysis does not
provide this period-by-period capital recovery information, which is a

## "Soft" Capital Rationing

capital rationing that under certain circumstances can be violated or even viewed
as made up of targets rather than absolute constraints.

## Abnormal returns

Part of the return that is not due to systematic influences (market wide influences). In
other words, abnormal returns are above those predicted by the market movement alone. Related: excess
returns.

## Absolute Right of Return

Goods may be returned to the seller by the purchaser without restrictions.

## Accounting rate of return (ARR)

A method of investment appraisal that measures
the profit generated as a percentage of the
investment – see return on investment.

## accounting rate of return (ARR)

the rate of earnings obtained on the average capital investment over the life of a capital project; computed as average annual profits divided by average investment; not based on cash flow

Amounts in excess of the par value or stated value that have been paid by the public to acquire stock in the company; synonymous with capital in excess of par.

Any payment received from investors for stock that exceeds
the par value of the stock.

Difference between issue price and par value of stock. Also called capital surplus.

## After-tax real rate of return

Money after-tax rate of return minus the inflation rate.

## Aggressive Capitalization Policies

capitalizing and reporting as assets significant portions of
expenditures, the realization of which require unduly optimistic assumptions.

## Aggressive Cost Capitalization

Cost capitalization that stretches the flexibility within generally
accepted accounting principles beyond its intended limits, resulting in reporting as assets
items that more reasonably should have been expensed. The purpose of this activity is likely to
alter financial results and financial position in order to create a potentially misleading impression
of a firm's business performance or financial position.

## annual return

The fund return, for any 12-month period, including changes in unit value and the reinvestment of distributions, but not taking into account sales, redemption, distribution or other optional charges or income taxes payable by any unitholder that would reduce returns.

## Annualized holding period return

The annual rate of return that when compounded t times, would have
given the same t-period holding return as actually occurred from period 1 to period t.

## Arithmetic average (mean) rate of return

Arithmetic mean return.

## Arithmetic mean return

An average of the subperiod returns, calculated by summing the subperiod returns
and dividing by he number of subperiods.

## authorized share capital

Maximum number of shares that the company is permitted to issue, as specified in the firm’s articles of incorporation.

## Average accounting return

The average project earnings after taxes and depreciation divided by the average
book value of the investment during its life.

## Average cost of capital

A firm's required payout to the bondholders and to the stockholders expressed as a
percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total
required cost of capital by the total amount of contributed capital.

## Average rate of return (ARR)

The ratio of the average cash inflow to the amount invested.

## book rate of return

Accounting income divided by book value.
Also called accounting rate of return.

## Book Returns

Book yield is the investment income earned in a year on a portfolio of assets purchased over a number of years and at different interest rates, divided by the book value of those assets.

## Capital

Money invested in a firm.

## CAPITAL

The money, raised by selling stock or bonds or taking out loans, that you use to start, operate, and grow a business.

## Capital

The shareholders’ investment in the business; the difference between the assets and liabilities

## capital

A very broad term rooted in economic theory and referring to
money and other assets that are invested in a business or other venture
for the general purpose of earning a profit, or a return on the investment.
Generally speaking, the sources of capital for a business are
divided between debt and equity. Debt, as you know, is borrowed money
on which interest is paid. Equity is the broad term for the ownership
capital invested in a business and is most often called owners’ equity.
Owners’ equity arises from two quite different sources: (1) money or
other assets invested in the business by its owners and (2) profit earned
by the business that is retained and not distributed to its owners (called
retained earnings).

## Capital

The investment by a company’s owners in a business, plus the impact of any
accumulated gains or losses.

## Capital

a) Physical capital: buildings, equipment, and any materials used to produce other goods and services in the future rather than being consumed today.
b) Financial capital: funds available for acquiring real capital.
c) Human capital: the value of the education and experience that make people more productive.

## Capital

Expenditures Purchases of productive long-lived assets, in particular, items of property,
plant, and equipment.

## Capital

Any asset or stock of assets, financial or physical, capable of producing income.

## Capital account

Net result of public and private international investment and lending activities.

## Capital Account

That part of the balance of payments accounts that records demands for and supplies of a currency arising from purchases or sales of assets.

## Capital allocation

decision Allocation of invested funds between risk-free assets versus the risky portfolio.

## capital asset

an asset used to generate revenues or cost savings
by providing production, distribution, or service capabilities
for more than one year

## Capital asset

A fixed asset, something that is expected to have long-term usage within
a company, and which exceeds a minimum dollar amount (known as the capitalization
limit, or cap limit).

## Capital asset pricing model (CAPM)

An economic theory that describes the relationship between risk and
expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk
that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification.
The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security

## Capital Asset Pricing Model (CAPM)

A model for estimating equilibrium rates of return and values of
assets in financial markets; uses beta as a measure of asset risk
relative to market risk

## capital asset pricing model (CAPM)

Theory of the relationship between risk and return which states that the expected risk
premium on any security equals its beta times the market risk premium.

## Capital budget

A firm's set of planned capital expenditures.

## capital budget

management’s plan for investments in longterm
property, plant, and equipment

## capital budget

List of planned investment projects.

## Capital budgeting

The process of choosing the firm's long-term capital assets.

## capital budgeting

Refers generally to analysis procedures for ranking
investments, given a limited amount of total capital that has to be allocated
among the various capital investment opportunities of a business.
The term sometimes is used interchangeably with the analysis techniques
themselves, such as calculating present value, net present value,
and the internal rate of return of investments.

## Capital Budgeting

The process of ranking and selecting investment alternatives and
capital expenditures

## capital budgeting

a process of evaluating an entity’s proposed
long-range projects or courses of future activity for
the purpose of allocating limited resources to desirable
projects

## Capital budgeting

The series of steps one follows when justifying the decision to purchase
an asset, usually including an analysis of costs and related benefits, which
should include a discounted cash flow analysis of the stream of all future cash flows
resulting from the purchase of the asset.

## capital budgeting decision

Decision as to which real assets the firm should acquire.

## Capital Consumption Allowance

See depreciation.

## Capital Cost Allowance (CCA)

The annual depreciation expense allowed by the Canadian Income Tax Act.

## Capital employed

The total of debt and equity, i.e. the total funds in the business.

## Capital expenditures

Amount used during a particular period to acquire or improve long-term assets such as
property, plant or equipment.

## capital expenditures

Refers to investments by a business in long-term
operating assets, including land and buildings, heavy machinery and
equipment, vehicles, tools, and other economic resources used in the
operations of a business. The term capital is used to emphasize that
these are relatively large amounts and that a business has to raise capital
for these expenditures from debt and equity sources.

## Capital flight

The transfer of capital abroad in response to fears of political risk.

## Capital Flows

Purchase by foreigners of our assets (capital inflows) or our purchase of foreign assets (capital outflows).

## Capital gain

When a stock is sold for a profit, it's the difference between the net sales price of securities and
their net cost, or original basis. If a stock is sold below cost, the difference is a capital loss.

## Capital gain

The gain recognized on the sale of a capital item (fixed asset), calculated
by subtracting its sale price from its original purchase price (less the impact of any
associated depreciation).

## Capital Gain

An increase in the value of an asset.

## capital gain

The positive difference between the adjusted cost base of an investment held as a capital property and the proceeds of disposition you receive when you sell it. When you sell such an investment for more than you paid, you realize a capital gain.

## Capital gains yield

The price change portion of a stock's return.

## CAPITAL IN EXCESS OF PAR VALUE

What a company collected when it sold stock for more than the par value per share.

## Capital in excess par

Amounts in excess of the par value or stated value that have been paid by the public to acquire stock in the company; synonymous with additional paid-in capital.

## capital investment analysis

Refers to various techniques and procedures
used to determine or to analyze future returns from an investment
of capital in order to evaluate the capital recovery pattern and the
periodic earnings from the investment. The two basic tools for capital
investment analysis are (1) spreadsheet models (which I strongly prefer)
and (2) mathematical equations for calculating the present value or
internal rate of return of an investment. Mathematical methods suffer
from a lack of information that the decision maker ought to consider. A
spreadsheet model supplies all the needed information and has other

## Capital Investments

Money used to purchase fixed assets for a business, such as land, buildings, or machinery. Also, money invested in a business on the understanding that it will be used to purchase permanent assets rather than to cover day-to-day operating expenses.

## Capital lease

A lease obligation that has to be capitalized on the balance sheet.

## Capital lease

A lease in which the lessee obtains some ownership rights over the asset
involved in the transaction, resulting in the recording of the asset as company property
on its general ledger.

## Capital Lease

One where substantially all of the benefits and risks of ownership are transferred to the lessee. It must be reflected on the company's balance sheet as an asset and corresponding liability.

## Capital loss

The difference between the net cost of a security and the net sale price, if that security is sold at a loss.

## capital loss

The negative difference between the adjusted cost base of an investment held as a capital property and the proceeds of disposition you receive when you sell it. When you sell such an investment for less than you paid, you incur a capital loss.

## Capital market

The market for trading long-term debt instruments (those that mature in more than one year).

## Capital market

The market in which investors buy and sell shares of companies, normally associated with a Stock Exchange.

## Capital Market

A market that specializes in trading long-term, relatively high risk
securities

## Capital Market

The market in which savings are made available to those needing funds to undertake investment projects. A financial market in which longer-term (maturity greater than one year) bonds and stocks are traded.

## Capital market efficiency

Reflects the relative amount of wealth wasted in making transactions. An efficient
capital market allows the transfer of assets with little wealth loss. See: efficient market hypothesis.

## Capital market imperfections view

The view that issuing debt is generally valuable but that the firm's
optimal choice of capital structure is a dynamic process that involves the other views of capital structure (net
corporate/personal tax, agency cost, bankruptcy cost, and pecking order), which result from considerations of
asymmetric information, asymmetric taxes, and transaction costs.

## Capital market line (CML)

The line defined by every combination of the risk-free asset and the market portfolio.

## capital markets

Markets for long-term financing.

## Capital Mobility

A situation in which assets can easily be purchased by foreigners.

## Capital rationing

Placing one or more limits on the amount of new investment undertaken by a firm, either
by using a higher cost of capital, or by setting a maximum on parts of, and/or the entirety of, the capital
budget.

## capital rationing

a condition that exists when there is an
upper-dollar constraint on the amount of capital available
to commit to capital asset acquisition

## capital rationing

Limit set on the amount of funds available for investment.

## capital stock

corporation may issue more than one class of capital stock shares.
One class may give voting privileges in the election of the directors of the
corporation while the other class does not. One class (called preferred
stock) may entitle a certain amount of dividends per share before cash
dividends can be paid on the other class (usually called common stock).
Stock shares may have a minimum value at which they have to be issued
(called the par value), or stock shares can be issued for any amount
(called no-par stock). Stock shares may be traded on public markets such
as the New York Stock Exchange or over the Nasdaq network. There are
on this number). In this regard, I find it very interesting that there are
more than 8,000 mutual funds that invest in stocks.

## Capital Stock

The total amount of plant, equipment, and other physical capital.

## Capital structure

The makeup of the liabilities and stockholders' equity side of the balance sheet, especially
the ratio of debt to equity and the mixture of short and long maturities.

## Capital Structure

The combination of debt, preferred stock, and common stock used
by a company to provide capital for the purchase of its fixed
assets

## capital structure

Firm’s mix of long-term financing.

## Capital Structure

The mix of the various types of debt and equity capital maintained by a firm. The more debt capital a firm has in its capital structure, the more highly leveraged the firm is considered to be.

## capital structure, or capitalization

Terms that refer to the combination of
capital sources that a business has tapped for investing in its assets—in
particular, the mix of its interest-bearing debt and its owners’ equity. In a
more sweeping sense, the terms also include appendages and other features
of the basic debt and equity instruments of a business. Such things
as stock options, stock warrants, and convertible features of preferred
stock and notes payable are included in the more inclusive sense of the
terms, as well as any debt-based and equity-based financial derivatives

## Capital surplus

Amounts of directly contributed equity capital in excess of the par value.

## Capitalism

An economic system in which the marketplace, through the pricing mechanism, determines the allocation and distribution of scarce goods and services, with a minimum of government involvement.

## Capitalization

The debt and/or equity mix that fund a firm's assets.

## Capitalization

The total amount of debt and equity issued by a company.

## Capitalization method

A method of constructing a replicating portfolio in which the manager purchases a
number of the largest-capitalized names in the index stock in proportion to their capitalization.

## capitalization of costs

When a cost is recorded originally as an increase
to an asset account, it is said to be capitalized. This means that the outlay
is treated as a capital expenditure, which becomes part of the total
cost basis of the asset. The alternative is to record the cost as an expense
immediately in the period the cost is incurred. capitalized costs refer
mainly to costs that are recorded in the long-term operating assets of a
business, such as buildings, machines, equipment, tools, and so on.

## Capitalization Rate

A discount rate used to find the present value of a series of future cash receipts. Sometimes called discount rate.

## Capitalization ratios

Also called financial leverage ratios, these ratios compare debt to total capitalization
and thus reflect the extent to which a corporation is trading on its equity. capitalization ratios can be
interpreted only in the context of the stability of industry and company earnings and cash flow.

## Capitalization table

A table showing the capitalization of a firm, which typically includes the amount of
capital obtained from each source - long-term debt and common equity - and the respective capitalization
ratios.

## Capitalize

To make a payment that might otherwise be an expense (in the Profit and Loss account) an asset
(in the Balance Sheet).