Return on capital employed (ROCE)

Indicator of profitability of the firm's capital investments. Determined by dividing Earnings Before Interest and Taxes by (capital employed plus short-term loans minus intangible assets). The idea is that this ratio should at least be greater than the cost of borrowing.

Return on Capital Employed

A measurement of return on the investment needed for a business to function, otherwise known as capital employed, expressed as a dollar amount or a percentage. It is used to show a business' health, specifically by showing how efficiently its investments are used to create a profit. A good ROCE is one that is greater than the rate at which the company borrows.

Because capital employed has no set definition, there are different ways to calculate ROCE. Two common ways are:

ROCE = (Operating Profit Before Tax) / (Total Assets - Current Liabilities) and ROCE = ((Profit before Tax) / (Capital Employed)) * 100.

One limitation to ROCE is the fact that it does not account for depreciation of the capital employed. Because capital employed is in the denominator, a company with depreciated assets may find its ROCE increases without an actual increase in profit. It also neglects inflation, which might depress ROCE unnecessarily. See also: Return on Average Capital Employed (ROACE), Required return.

return on capital employed (ROCE)

an accounting measure of a firm's PROFITABILITY, which expresses the firm's PROFITS for an accounting period as a percentage of its period-end capital employed. Generally, profit is taken before deduction of tax and is related to LONG-TERM CAPITAL EMPLOYED, though broader comparisons are possible, which relate profit before tax and interest payments to all ASSETS employed, and narrower comparisons which relate aftertax profit to shareholders' capital. A firm's return on capital depends upon its PROFIT MARGINS RATIO and its ASSET TURNOVER RATIO, the first being a multiple of the last two, thus

Return on capital employed provides a key measure of management performance in earning profits from the assets which they control. To improve return on capital employed managers need to:

profit/long-term capital = profit/sales x sales/long-term capital

improve profit margins either by reducing unit production and selling costs, or by increasing selling prices of products;
improve asset turnover either by increasing sales volumes using present assets, or by reducing the FIXED ASSETS and CURRENT ASSETS employed to achieve present sales volumes.

return on capital employed

an accounting measure of a firm's PROFITABILITY that expresses the firm's PROFITS for a time period as a percentage of its period-end capital employed. Generally profit is taken before deduction of tax and is related to long-term capital employed, although broader comparisons are possible that relate profit before tax and interest payments to all ASSETS employed, and narrower comparisons that relate after-tax profit to shareholders’ capital.

Under COMPETITION POLICY, return on capital employed is used to ascertain whether a firm is earning NORMAL PROFIT or ABOVE-NORMAL PROFIT. See also ALLOCATIVE EFFICIENCY, PUBLIC INTEREST.