About Return on Capital Employed (ROCE)

What is Return on Capital Employed (ROCE)?

Return on Capital Employed (ROCE) is a financial ratio that measures a company's profitability and the efficiency with which its capital is employed. It is calculated by expressing profit as a percentage of capital employed. ROCE is a useful metric for comparing the performance of companies in capital-intensive sectors.

Formula for ROCE

The formula to calculate ROCE is:

\[\text{ROCE} = \frac{\text{Profit}}{\text{Capital Employed}} \times 100\%\]

Where:

• Profit is typically Earnings Before Interest and Tax (EBIT)
• Capital Employed = Total Assets - Current Liabilities

Calculation Steps

1. Calculate Capital Employed by subtracting Current Liabilities from Total Assets.
2. Divide Profit by Capital Employed.
3. Multiply the result by 100 to express it as a percentage.

Example

Let's calculate the ROCE for a company with the following financial data:

• Profit (EBIT): $100,000
• Total Assets: $500,000
• Current Liabilities: $100,000

1. Capital Employed: \($500,000 - $100,000 = $400,000\)
2. ROCE: \(\frac{$100,000}{$400,000} \times 100\% = 25\%\)

Visual representation:

Therefore, the ROCE for this company is 25%, meaning it generates $0.25 in profit for every dollar of capital employed.