ROCE (return on capital employed)
Measures the return on all capital in the company, both debt and equity.
ROCE, or return on capital employed, is a measure showing how much profit a business generates relative to the total capital invested in the business.
It includes both equity and debt capital, and gives an insight into the business's ability to generate a return on all the capital employed.
How it is calculated
ROCE is calculated by dividing the operating profit before interest and tax (EBIT) by the average capital employed in the same period, and then multiplying by 100 to give a percentage. The formula is as follows:
ROCE = (Operating profit before interest and tax / Average capital) × 100
Average capital is calculated by taking the sum of equity and debt capital at the beginning of the period, adding the same sum at the end of the period, and dividing by 2. It is therefore the average of two measurement dates, not the sum of four separate items.
Capital employed is normally defined as total assets less current liabilities.
What is ROCE used for?
ROCE is an important measure for assessing how well a business generates a return on all the capital employed, both debt and equity. It helps investors and stakeholders evaluate the company's profitability and its efficiency in the use of capital. A high ROCE indicates that the company makes good use of its capital and is able to generate a return for owners and lenders alike.
Tips for improving ROCE
- Improve profitability. Increase income and/or reduce costs in order to improve the operating profit.
- Optimal capital allocation. Evaluate the profitability of different projects or investment opportunities in order to ensure that capital is used in the most profitable areas.
- Efficiency improvements. Put measures in place to improve efficiency and productivity in the business, for example through automation of processes or training of staff.
- Capital structure. Consider the composition of equity and debt capital in order to optimise the capital structure and reduce financial risk.
- Continuous monitoring. Follow ROCE over time and identify trends or deviations that may call for adjustments to the business's strategy or operations.
Read more about how Capassa automates key figures.
More terms in returns and investment analysis
See all →ROE (return on equity)
Measures the return a business generates on the equity its shareholders have invested.
ROA (return on assets)
Shows how efficiently a business uses its total assets to generate profit.
ROI (return on investment)
Measures the profitability of an investment relative to what it cost.
WACC (weighted average cost of capital)
The weighted average cost of capital: the minimum return the company must deliver to its investors and lenders.
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