Return on Capital Employed (ROCE)

Return on Capital Employed (ROCE) is a financial ratio that measures a company’s profitability and the efficiency with which it uses its capital. It is calculated by dividing earnings before interest and tax (EBIT) by the capital employed (total assets minus current liabilities). ROCE indicates how effectively a company generates profits from its capital, with higher values indicating better capital efficiency. It is a useful metric for comparing companies within the same industry and for assessing capital-intensive businesses.

Example

A company with EBIT of $3 million and capital employed of $15 million has a ROCE of 20%, indicating that it generates $0.20 of profit for every dollar of capital employed.

Key points

• Measures profitability relative to the capital invested in the business.

• Calculated as EBIT divided by capital employed (assets minus liabilities).

• Higher ROCE values suggest more efficient use of capital.

Quick Answers to Curious Questions

Why is ROCE important for assessing a company's efficiency?

It provides insight into how effectively a company is using its capital to generate profits, helping investors gauge operational efficiency.

How does ROCE differ from ROA?

ROCE focuses on capital employed (assets minus liabilities), while ROA measures profitability relative to total assets.

What types of companies benefit from a high ROCE?

Capital-intensive businesses, such as those in manufacturing or utilities, benefit from a high ROCE as it indicates efficient use of their capital base.