Return On Capital Employed (ROCE)

Profitability ratios Print Email

Definition

Return on capital employed (ROCE) is a measure of the returns that a business is achieving from the capital employed, usually expressed in percentage terms. Capital employed equals a company's Equity plus Non-current liabilities (or Total Assets − Current Liabilities), in other words all the long-term funds used by the company. ROCE indicates the efficiency and profitability of a company's capital investments.

ROCE should always be higher than the rate at which the company borrows otherwise any increase in borrowing will reduce shareholders' earnings, and vice versa; a good ROCE is one that is greater than the rate at which the company borrows.

Calculation (formula)

ROCE = EBIT / Capital Employed = EBIT / (Equity + Non-current Liabilities) = EBIT / (Total Assets - Current Liabilities)

A more accurate 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.

One limitation of ROCE is the fact that it does not account for the depreciation and amortization of the capital employed. Because capital employed is in the denominator, a company with depreciated assets may find its ROCE increases without an actual increase in profit.

Exact Formula in the ReadyRatios Analytic Software

ROCE (ROACE) = EBIT*(365/NUM_DAYS) / ((F1[b][Equity] + F1[b][NoncurrentLiabilities]+F1[e][Equity] + F1[e][NoncurrentLiabilities])/2)

F2 – Statement of comprehensive income (IFRS).
F1[b], F1[e] - Statement of financial position (at the [b]eginnig and at the [e]nd of the analizing period).
NUM_DAYS – Number of days in the the analizing period.
365 – Days in a year. 

Quote Guest, 17 January, 2013
As a lay person trying to understand the formula, it was confusing as it was more involved than the more simplistic one I had previously seen. A calculation example would have helped here. Also having to work out the accronyms. Like legal jargon, the accounting jargon seems to vary which also does not help.
Quote Guest, 5 February, 2013
I may be incorrect but in your definition you do not mention operating profit as the return part of return on capital employed. Also you give a formula for ROACE but not a full formula for ROCE wouldn't it be a good idea to clearly define the first part then build upon the foundations you have built?
Quote Vit. A., 6 February, 2013
Quote
Guest wrote:
I may be incorrect but in your definition you do not mention operating profit as the return part of return on capital employed. Also you give a formula for ROACE but not a full formula for ROCE wouldn't it be a good idea to clearly define the first part then build upon the foundations you have built?

Here is EBIT used as the return part of return on capital employed. It's not a dogma but common practice.
Why ROACE formula is not full? As we can see on this page it differs from ROCE only as it use average values of capital employed.
Quote Guest, 8 April, 2013
In my opinion, it is my favorite ratio :) It changes my every day life !!!!

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