Return on Capital Employed
(ROCE)

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Measuring the efficiency of capital investments. Explanation of Return on Capital Employed. ROCE ratio.

What is Return on Capital Employed? Description

ROCE is a ratio which indicates the efficiency and profitability of the capital investments of a company.

In other words: the ROCE ratio is an indicator of how well a company is utilizing capital to generate revenue.

ROCE should normally be higher than the borrowing rate from the company, otherwise any increase in borrowings will reduce shareholders' earnings.

Calculation of Return on Capital Employed. Formula

The calculation of Return on Capital Employed is done by taking profit before interest and tax (EBIT) and dividing that by the difference between total assets and current liabilities.

See the figure on the right.

Book: Steven M. Bragg - Business Ratios and Formulas : A Comprehensive Guide -

Book: Ciaran Walsh - Key Management Ratios -

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Recent User Comments

    			 
             Cecilia Mannerbro - Sweden
  	       
  		     Acceptable Level of ROCE
  	  		 "What is a good level for ROCE in order for it to be "value adding" in a company?"
  			   
    	  		 0

    			 
  			   Samir - UK
  	       
  		     ROCE Lower than Borrowing Rate
  	  		 "Can anyone please break down for me how shareholders earnings will be reduced if ROCE is lower than the borrowing rate?"
  			   
    	  		 0

    			 
  			   Kate - UK
  	       
  		     confused
  	  		 "why are there so many different variations of the same formula for example i was told that ROCE  was net proft divided by fixed assets plus current assets ?"
  			   
    	  		 0

    			 
  			   Susan - USA
  	       
  		     ROACE
  	  		 "A variation of this ratio is Return on Average Capital Employed (ROACE), which takes the average of opening and closing capital employed for the time period."
  			   
    	  		 5

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                      └► Editor (Netherlands)
                      
                    Good ROCE Level
                    "The higher is the ROCE, the better. Because the firm is then earning more money with the capital that has been supplied by its shareholders."

└► Abhishek Bhatt (India)	Financial Management	"Kate, I would like to answer your question that a same formula can be expressed in a number of ways. As you said that ROCE=NP/FA+CA. Above formula can also be expressed as : EBIT(net profit)/ (Fixed asset+ net current asset and not current asset.) or (Net worth+long term liabilities)."
└► Franky Chen (China)	Confusion	"Someone insists that ROCE = Operating Income After Tax / Operating Assets. Here is EBIT. Is it misunderstanding?"
└► Editor (NL)	To Franky	"Yes, is misunderstanding. EBIT is the same as Operating Profilt !"

Return on Capital Employed (ROCE)