Return on Capital Employed
Return on Capital Employed (ROCE) is a financial metric that measures a company’s profitability and the efficiency with which its Capital is employed. It is calculated by dividing the operating profit by the total Capital employed, which includes Equity and debt. The formula is:
ROCE = (Operating Profit / Capital Employed) x 100
Where:
- Operating Profit: This is the profit earned from the company’s core business operations, excluding any income derived from non-operating activities.
- Capital Employed: This is the total amount of Capital used for the acquisition of profits, typically calculated as total Assets minus Current Liabilities or as Equity plus long-term debt.
Examples:
- A manufacturing company has an operating profit of $500,000 and total Capital employed of $2,000,000. The ROCE would be (500,000 / 2,000,000) x 100 = 25%.
- A retail business generates an operating profit of $200,000 with Capital employed of $1,000,000. The ROCE would be (200,000 / 1,000,000) x 100 = 20%.
Cases:
- High ROCE indicates efficient use of Capital, often attracting investors, as seen in companies like Apple Inc. with consistent ROCE above 30%.
- Low ROCE may signal inefficiencies or underperformance, like in some heavily indebted firms struggling to generate sufficient operating profit.