Return on capital employed (ROCE)

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and notes

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Return on capital employed (ROCE)

ROCE =

Net operating profit

(Total assets - Current liabilities)

INTERPRETATION

The return on capital employed (ROCE) is a valuable measure of a company’s profitability, adjusted for the amount of capital used.

Business owners, managers, and especially investors consider this ratio when evaluating how much profit each dollar of capital employed generates.

Note: expanded calculation

Divide net operating profit or EBIT by the employed capital, which is total assets minus current liabilities

EXAMPLE

M&M had a net operating profit of $100,000. They reported $100,000 of total assets and $25,000 of current liabilities on their balance sheet for the year.

Return on capital employed = $100,000 / ($100,000 – $25,000) = 1.33 

A return of 1.33 means that for every dollar invested in employed capital, M&M earns $1.33

BENCHMARK: PG, ROT

A “good” ROCE varies between industries, but, on average, it tends to be around 10%.

For investors, the higher the ROCE, the better, which means more profits are generated per dollar of capital employed.

ROCE:

ABBREVIATION KEY:

ROT: Rule of thumb
HA: Historical Average (organization’s historical average)
PG: Peer Group average
EB: Economic Benchmark

DISCLAIMER: The interactive calculators on this site are self-help tools intended to help you visualize and explore your financial information. They are not intended to replace the advice of a qualified professional. Because each business is different, we can not guarantee accuracy.