ROCE (Return on Capital Employed): Formula, Example & How to Interpret It

What Is ROCE?

ROCE (Return on Capital Employed) measures how efficiently a company generates profits from the total capital it uses, both equity and debt. It’s considered one of the most complete profitability ratios because it looks beyond short-term earnings to show how effectively management puts resources to work.

In simple terms, ROCE tells investors how much operating profit a company earns for every unit of capital employed. For example, a ROCE of 20% means the company makes 20 cents of profit for each dollar invested in the business.

Why ROCE Matters

ROCE is often used by investors and analysts to compare companies across sectors or track performance over time. It helps identify businesses that use their funds wisely and maintain high financial efficiency even as they grow.

For long-term investors, a consistently high ROCE is a sign of strong management and durable profitability.

ROCE in Capital-Intensive Industries

ROCE is especially useful in sectors that require heavy investment,  like energy, manufacturing, or telecoms, where profits depend on how effectively companies manage large asset bases. 

Comparing ROCE between peers in these industries helps reveal who’s getting more out of every dollar of capital employed.

ROCE Formula

The ROCE formula shows how much profit a company makes from the capital it uses in its operations. 

It combines EBIT (Earnings Before Interest and Tax), or sometimes NOPAT (Net Operating Profit After Tax), with the total capital employed to reveal a company’s capital efficiency.

Formula:
ROCE = EBIT / Capital Employed × 100

Some analysts prefer using NOPAT instead of EBIT because it accounts for taxes, giving a more realistic view of operating profitability.

How to Calculate ROCE

To calculate Return on Capital Employed, take the company’s EBIT (or operating profit) and divide it by capital employed, which represents the total funds used to run the business. The result is expressed as a percentage that shows how efficiently the company is generating returns.

Capital Employed Explained

Capital employed can be found in two ways:

• Total assets minus current liabilities

• Shareholders’ equity plus long-term debt

It includes both equity and debt, giving a full picture of the company’s funding structure, its capital structure. To understand leverage alongside ROCE, many analysts also watch the gearing ratio and the debt-to-asset ratio.

EBIT vs NOPAT

EBIT is often used when comparing companies regardless of tax differences or financing decisions.
NOPAT adjusts for taxes, making it more accurate when comparing companies with different tax rates.
Both represent operating profit, which shows how effectively a business turns revenue into profit before financing costs.

Example Calculation

Imagine a company with an EBIT of 2 million dollars and capital employed of 10 million dollars.

ROCE = 2,000,000 / 10,000,000 × 100 = 20%

This means the company earns a 20% return on the capital employed, a strong indicator of profitability and operational efficiency.

How to Interpret ROCE

A company’s ROCE tells you how efficiently it’s using its money to generate profits. The higher the ratio, the better the business is at turning capital into earnings. 

When ROCE starts falling year after year, it can signal that profitability is declining or that the company is investing in assets that aren’t producing enough returns.

What Is a Good ROCE?

There isn’t a single number that defines a “good” ROCE, because it depends on the industry. In general, a company’s ROCE should be higher than its cost of capital, otherwise, it’s not creating value for shareholders. 

For many established businesses, a ROCE above 15-20% is usually considered strong, but benchmarks vary widely by sector.

ROCE vs Cost of Capital (WACC)

The Weighted Average Cost of Capital (WACC) represents the minimum return a company must earn to satisfy investors and lenders. If ROCE is higher than WACC, the company is generating real economic profit. 

If it’s lower, it’s destroying value, even if it appears profitable on paper. Comparing ROCE to WACC gives a clearer view of whether capital is being used effectively.

ROCE Trend Analysis

Tracking ROCE over time helps reveal how management decisions impact performance. A rising ROCE shows improving efficiency and strong operational control. 

A declining ROCE, on the other hand, may suggest poor asset utilization, higher costs, or over-expansion. Investors often look at multi-year trends rather than single-year figures to identify sustainable profitability.

ROCE vs Other Profitability Ratios

While ROCE measures how efficiently a company uses all its capital, other efficiency ratios and profitability metrics focus on different parts of the business. Understanding how they relate helps investors see the full financial picture.
 

ROCE vs ROIC

ROIC (Return on Invested Capital) and ROCE are closely related. The main difference is that ROIC focuses only on invested capital that generates operating profit, while ROCE includes all capital employed, even parts that may not be actively earning returns. In practice, ROIC is slightly more precise, but ROCE is easier to calculate and widely used in corporate analysis.

ROCE vs ROA

ROA (Return on Assets) looks only at how much profit a company earns from its total assets. ROCE goes further by factoring in long-term financing, both debt and equity, making it more useful when comparing companies with different capital structures.

ROCE vs ROE

ROE (Return on Equity) focuses only on shareholder returns. ROCE, on the other hand, includes debt, showing how efficiently a company uses all sources of funding. A company can have a high ROE but a lower ROCE if it’s heavily leveraged, meaning debt is boosting equity returns artificially.

Limitations of ROCE

ROCE is a helpful indicator, but it has several limitations investors should keep in mind:

• Depreciation effects: Older companies often show higher ROCE because their asset values are reduced by depreciation, even if real performance hasn’t improved.

• Book value distortions: ROCE relies on historical asset values, which may not reflect current market conditions or inflation.

• Accounting differences: Variations in how companies record leases, goodwill, or intangible assets can make comparisons misleading.

• Capital structure bias: Businesses with little debt may appear less efficient because their total capital base is higher.

• Short-term volatility: A temporary rise in profits or asset revaluation can distort the ratio for a single period.

How to Improve ROCE

A company can improve its ROCE by increasing operating profit, reducing the amount of capital employed, or both. The goal is to make the business more efficient without taking on unnecessary risk.

Ways to improve ROCE:

• Increase operating profit: Boost revenue through pricing or volume growth, and manage costs to widen operating margins.

• Optimize capital employed: Sell or repurpose underused assets, tighten inventory control, and manage receivables efficiently to free up working capital.

• Refinance debt wisely: Lower interest expenses and maintain a balanced capital structure to support long-term profitability.

• Improve asset turnover: Use existing assets more effectively instead of relying on new investments.

• Review capital projects: Focus only on investments that generate returns higher than the company’s cost of capital (WACC).
   

Industry Benchmarks

There’s no single “ideal” ROCE value because it varies across industries. Comparing a company only to others in the same sector gives a more accurate view of its performance and efficiency.

High-Capital Industries

Sectors such as utilities, energy, manufacturing, and telecommunications require heavy investment in fixed assets. 

Because of this large capital base, their ROCE ratios tend to be lower, typically between 5% and 15%. A small increase in ROCE here often signals strong operational improvements.

Low-Capital Industries

Service-based or technology companies usually have fewer physical assets, so they can achieve higher ROCE values, often above 20%. These businesses rely more on intellectual property, software, or human capital, which allows them to generate higher returns on smaller capital bases.

Benchmarks are best used for comparison, not as strict targets. What matters most is whether a company’s ROCE is improving over time and outperforming its closest peers.

Conclusion

ROCE is more than just another profitability ratio. It´s a clear measure of how well a company turns its invested capital into real performance. When used correctly, it helps investors and analysts see which businesses are genuinely creating value and which are simply growing without improving efficiency.

Still, ROCE should never be viewed in isolation. It works best when compared with industry peers, evaluated against the company’s cost of capital, and analyzed over time. Together, these insights offer a deeper look into the quality of management decisions and the sustainability of a company’s profits.

For a quick reference across metrics, keep our Financial Ratios Cheat Sheet handy when you analyze ROCE next time.