ROCE (Return on Capital Employed)

See Also:
ROE (Return on Equity)
ROIC (Return on Invested Capital)

ROCE (Return on Capital Employed) Definition

ROCE stands for Return on Capital Employed; it is a financial ratio that determines a company’s profitability and the efficiency the capital is applied. A higher ROCE implies a more economical use of capital; the ROCE should be higher than the capital cost. If not, the company is less productive and inadequately building shareholder value.

ROCE Formula

Use the following formula to calculate ROCE:

ROCE =  EBIT/Capital Employed.

EBIT = Earnings Before Interest and Tax
Capital Employed = Total AssetsCurrent Liabilities.

Calculating Return on Capital Employed is a useful means of comparing profits across companies based on the amount of capital. It is insufficient to look at the EBIT alone to determine which company is a better investment. You also have to look at the capital and calculate the ROCE. Many consider ROCE a more reliable formula than ROE for calculating a company’s future earnings because current liabilities and expenses.


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ROCE Example

Look at the following table to see the importance ofReturn on Capital Employed (ROCE) in action.

Return on Capital Employed

Both Company A and Company B sell computers. Company A represents the Old Factory model; they are a distribution company that sells business to business. Company B is the New Factory; they are also a distribution company, but they sell on the Internet via credit card. Due to this modern convenience, Company B is able to receive payment within two days instead of the forty-five it takes Company A.

If you were to just consider EBIT, then Company A looks like the better investment at 7% return on sales compared to Company B’s 5%; however, with such a large DSO number, Company A is out $6,000,000 more than Company B at any given time. This means Company B needs less capital invested in the company which would result in a higher return on equity (ROE).

Thirty years ago, a similar scenario played out between IBM (Company A) and Dell (Company B). In his college dorm room, Michael Dell started taking credit card sales over the phone and was able to grow a billion dollar company with very little capital.

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Return on Capital Employed

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Return on Capital Employed

(Originally published by  on June 9, 2016)

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4 Responses to ROCE (Return on Capital Employed)

  1. Orlando June 25, 2018 at 11:21 pm #

    The arithmetic on the ROE calculation is incorrect

    • Lauren Jefferson June 26, 2018 at 10:41 am #

      Hi Orlando! Thank you for bringing this to our attention. We have fixed the issue.

  2. Steven_Nog December 22, 2018 at 1:11 am #

    ROCE is especially useful when comparing the performance of companies in capital-intensive sectors such as utilities and telecoms. This is because unlike other fundamentals such as return on equity (ROE), which only analyzes profitability related to a company’s common equity, ROCE considers debt and other liabilities as well. This provides a better indication of financial performance for companies with significant debt.
    And Happy New Year!

  3. Chris October 14, 2019 at 3:32 pm #

    How would you calculate the ROCE on a Month-on-Month basis?

    If Month 1 is EBIT (for 1 month) divided by the Capital Employed in the Balance Sheet.

    Would month 2 be EBIT cumulative (i.e. month 1 + month 2) divided by the Capital Employed in the Balance Sheet at the end of Month 2? Or do I divide this by 2?

    And then what about month 3, 4, 5, 6, etc …

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