Quick Summary
ROCE shows how efficiently a company generates profits from its capital employed.
Return on Capital Employed (ROCE) is a profitability ratio that measures how efficiently a company is using its capital to generate profits. It is particularly useful for comparing companies with different capital structures.
ROCE Formula
ROCE = (EBIT / Capital Employed) × 100
Where:
Capital Employed = Total Assets - Current Liabilities
Or
Capital Employed = Shareholders' Equity + Long-term Debt
Example
If a company has:
- EBIT: ₹50 lakhs
- Total Assets: ₹400 lakhs
- Current Liabilities: ₹100 lakhs
Capital Employed = ₹400 - ₹100 = ₹300 lakhs
ROCE = (₹50 / ₹300) × 100 = 16.67%
Advantages of ROCE
- Uses EBIT (before interest), enabling comparison across capital structures
- Focuses on long-term capital efficiency
- Useful for capital-intensive industries
- Better than ROE for debt-heavy companies
Key Points
- Measures capital efficiency
- Uses EBIT (pre-interest)
- Capital Employed = Assets - Current Liabilities
- Better than ROE for comparing leveraged companies
- Higher is better; compare with WACC