# Return on Capital Employed (ROCE)

Return on capital employed (ROCE) is the ratio of net operating profit of a company to its capital employed. It measures the profitability of a company by expressing its operating profit as a percentage of its capital employed. Capital employed is the sum of stockholders' equity and long-term finance. Alternatively, capital employed can be calculated as the difference between total assets and current liabilities. The formula to calculate return on capital employed is:

 ROCE = Net Operating Profit Capital Employed

A more accurate value can be calculated by using average capital employed which is the sum of average long-term finance and average stockholders' equity.

Some analysts use earnings before interest and tax (EBIT) instead of net profit while calculating return on capital employed.

Since ROCE includes long-term finance in the calculation, therefore it is more comprehensive test of profitability as compared to return on equity (ROE).

## Analysis

A higher value of return on capital employed is favorable indicating that the company generates more earnings per dollar of capital employed. A lower value of ROCE indicates lower profitability. A company having less assets but same profit as its competitors will have higher value of return on capital employed and thus higher profitability.

## Examples

The average stockholders' equity and average capital employed of a company during the accounting year ended December 31, 20X2 were \$348,000 and \$120,000 respectively. The net profit during the period was \$49,000. Calculate return on capital employed of the company.

Solution

Return on Capital Employed = 49,000 ÷ (348,000 + 120,000) = 10.5%

by Irfanullah Jan, ACCA and last modified on

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