Return on Capital Employed (ROCE)
IntermediateAlso known as: ROCE Return on capital employed (ROCE) is operating profit, usually EBIT, divided by capital employed, which is total assets minus current liabilities. It shows how efficiently a company generates profit from its long-term funding. Capital employed represents the long-term money used to run the business, from both shareholders and long-term lenders. ROCE measures how much operating profit each unit of that capital produces. For example, a company with EBIT of 300,000, total assets of 1.5 million and current liabilities of 400,000 has capital employed of 1.1 million. Its ROCE is about 27%. Because it uses operating profit before interest and considers both debt and equity, ROCE allows fair comparisons between companies with different capital structures. It is particularly popular for analysing capital-intensive industries, such as manufacturing, utilities and energy. ROCE is similar to return on invested capital. The main differences are that ROCE usually uses pre-tax EBIT and a simpler balance sheet definition of capital, while ROIC uses after-tax operating profit and a more refined measure of invested capital. A ROCE consistently above the company's cost of capital suggests the business is creating value. Comparing ROCE over time and against competitors helps investors judge how well management is using the money entrusted to it.
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