Return On Capital Employed (ROCE)
Updated on March 1, 2023
ROCE refers to the ability of a business to use its capital efficiently. It is a profitability ratio that is often used by investors to determine if investing in a particular business is viable and ultimately profitable. A company with a higher ROCE implies that the company has used its capital in optimum manner and a lower ROCE on the other hand implies that the capital is not employed efficiently. ROCE is primary measure of profitability in capital intensive businesses like Oil and Gas, Telecom and Communications, manufacturing, etc.
Formula for calculating ROCE
The formula for calculating ROCE is
ROCE = EBIT / Total Assets – Current Liabilities
Key factors to consider while using ROCE
Some of the key factors to consider while using ROCE are
ROCE on a standalone basis is not a n optimum measure of profitability of a business. Investors should also consider other parameters like ROE (Return on Equity), ROA (Return on Assets), etc.
ROCE is valuable information in comparing the performance of businesses within the same industry and not across different industries
Evaluate the ROCE of a company against the benchmark of the industry and not on individual level