Return On Capital Employed (ROCE)

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