Return on capital employed

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Return on Capital Employed (ROCE) is used in finance as a measure of the returns that a company is realizing from its capital employed. The ratio can also be seen as representing the efficiency with which capital is being utilized to generate revenue. It is commonly used as a measure for comparing the performance between businesses and for assessing whether a business generates enough returns to pay for its cost of capital.

1 The formula
2 Drawbacks of ROCE
3 Additional and alternative definitions
4 See also
5 References

[edit] The formula

$ROCE\ =\ \frac{Pretax\ operating\ profit}{Capital\ employed}\ =\ \frac{EBIT}{Total\ assets - Current\ liabilities}$

Ô==The Formula== Return on net assets (%) = (Operating Profit / Net assets) * 100

Return on net assets is also sometimes known as return on capital employed. ←←←←

[edit] Drawbacks of ROCE

The main drawback of ROCE is that it measures return against the book value of assets in the business. As these are depreciated the ROCE will increase even though cash flow has remained the same. Thus, older businesses with depreciated assets will tend to have higher ROCE than newer, more well invested businesses. In addition, while cash flow is affected by inflation, the book value of assets is not. *Revenues increase with inflation while capital employed generally does not (as the book value of assets is not affected by inflation)

[edit] Additional and alternative definitions

A different way to calculate ROCE is ROACE, Return on AVERAGE Capital Employed. Instead of using the capital as reported, it uses the average of opening and closing capital for the time period.