return on capital employed
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Return on capital employed (ROCE)
Return on Capital Employed
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.