Return on Capital Employed (ROCE)

Return on Capital Employed, or ROCE, compares operating profit with the total capital employed. The metric shows how efficiently a company uses all its capital to generate profit. A high value indicates an efficient use of funds.

It is usually calculated as EBIT divided by capital employed, which in turn is total assets less current liabilities or, equivalently, the sum of equity and non-current liabilities. Its advantage over return on equity is that capital structure drops out: a company can raise its return on equity purely through more debt without operating any better, while this metric is unchanged. It is informative within a sector and over time, because capital-intensive businesses structurally show lower values than asset-light ones. Two distortions deserve attention: high goodwill from past acquisitions increases capital employed and depresses the ratio, while fixed assets carried at low historical values artificially improve it. Return on invested capital is closely related, using operating profit after tax and therefore directly comparable with the weighted average cost of capital. That comparison answers the real question of whether a company creates value.

A ROIC of 12 percent against a comparable after-tax cost of capital of 8 percent means the return exceeds the cost of capital by four percentage points. Leases also affect comparability: since IFRS 16 they appear on the balance sheet and increase the capital base.

Comparisons also require a consistent choice between period-end and average capital employed. Major investments shortly before the reporting date can otherwise distort the ratio.