Return on Capital Employed (ROCE)

See Also:
Return on Asset Analysis
Return on Equity Analysis
Financial Ratios
Return on Invested Capital (ROIC)
Current Ratio Analysis

Return on Capital Employed (ROCE) Definition

The return on capital employed ratio is used as a measurement between earnings, and the amount invested into a project or company.

Return on Capital Employed (ROCE) Meaning

The return on capital employed is very similar to the return on assets (ROA), but is slightly different in that it incorporates financing. Because of this the ROCE calculation is more meaningful than the ROA. The ROCE is generally used to find out how efficient and profitable a company is from year to year. As it is a percentage a company can locate problems or areas of improvement with the fluctuation of this ratio from year to year.

Return on Capital Employed (ROCE) Equation

The return on capital employed equation is as follows:

ROCE = EBIT or NI/(Total Assets – Current Liabilities)

Note: The earnings before interest and taxes, known as the operating income, is normally used, but people can also use the Net Income if they would like to incorporate the net interest and taxes into the ROCE formula.

Return on Capital Employed (ROCE) Example

Tim found that the ROCE last year is 16%. He would like to compare this number to the current ROCE. He begins by finding the following numbers in the Balance Sheet as well as the Income Statement:

Net Income = $50,000
Total Assets = $360,000
Current Liabilities = $35,000

ROCE = $50,000/($360,000 – $35,000) = 15%

Note: The drop in this number means that Tim’s company is not as efficient as it used to be or that it decreased it current liabilities.

return on capital employed

Strategic CFO Lab Member Extra

Access your Flash Report Execution Plan in SCFO Lab. The step-by-step plan to create a dashboard to measure productivity, profitability, and liquidity of your company.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

return on capital employed

, , , , , , , ,

2 Responses to Return on Capital Employed (ROCE)

  1. Kevaal Manek March 22, 2018 at 9:17 pm #

    Isn’t the formula Profit before Tax/(Shareholders equity & Long term borrowings + Retained earnings) ?

  2. Mark June 18, 2018 at 12:30 pm #

    Okay so,

    Total Assets = Total Liability + Equity
    Total Assets = (Current Liabilities + Long term Liabilities) + Equity
    Total Assets – Current liabilities = Equity + Long term Liabilities
    Either way it is basically the same

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.