Return On Capital Employed
What is ROCE?
Return on Capital Employed (ROCE) represents a gauge of a company's profitability that considers the capital invested within the business. It's calculated by dividing a company's operating profit by its capital employed, where the operating profit is derived from the revenue minus operating expenses, and the capital employed encompasses long-term debt and shareholders' equity. It assists in performance assessments against competitors and guides resource allocation. Investors also rely on ROCE as a metric to aid investment decisions.
How do we calculate ROCE?
The formula for ROCE is as follows:
Considerations when calculating return on capital employed-
Calculating Return on Capital Employed (ROCE) demands attention to various aspects, such as maintaining consistent definitions across compared companies, encompassing all capital, excluding exceptional items, aligning time periods, accurately calculating EBIT, and precisely computing the capital employed figure.
Advantages of ROCE:
- Enhances performance assessment by integrating profitability and efficiency.
- Pinpoints areas of inefficient capital use.
- Strengthens investor confidence regarding returns.
- Evaluates capital efficiency and allocation strategies.
Disadvantages of ROCE:
- Comparability is limited between vastly different industries.
- Focuses on past results, which may not indicate future outcomes.
- Overlooks the effects of the company's capital structure.
- Fails to reflect the full scope of financial performance.
