Return On Capital Employed (ROCE)
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.
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.
- Debt ratios
- Liquidity ratios
- Profitability ratios
- Asset management ratios
- Cash Flow Indicator Ratios
- Market value ratios
- Financial analysis
- Business Terms
- Financial education
- International Financial Reporting Standards (EU)
- IFRS Interpretations (EU)
- Financial software
Most WantedFinancial Terms
- Most Important Financial Ratios
- Debt-to-Equity Ratio
- Financial Leverage
- Current Ratio
- Interest Coverage Ratio (ICR)
- Solvency Ratio
- Receivable Turnover Ratio
- Return On Capital Employed (ROCE)
- Debt Service Coverage Ratio
- Accounts Payable Turnover Ratio
Have 10 minutes to relax?Play our unique
Play The Game