# Return on capital employed

Return on capital employed

Return on Capital Employed (ROCE) is used in finance as a measure of the returns that a company is realising from its capital employed. 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.

The formula

Different authors use different definitions for the terms. [ [http://www.bized.co.uk/compfact/ratios/ror3.htm Financial Ratio Analysis - Return on Capital Employed Ratio ] ] A common definition is::$ext\left\{ROCE\right\} = frac\left\{ ext\left\{Pretax Operating Profit\left\{ ext\left\{Capital Employed = frac\left\{ ext\left\{Operating Revenue\right\} - ext\left\{Operating Expenses\left\{ ext\left\{Total Assets\right\} - ext\left\{Current Liabilities$or Roce = profit after tax (net profit)/ capital employed * 100

ROCE compares earnings with capital invested in the company. It is similar to Return on Assets (ROA), but takes into account sources of financing.

Operating Income

In the numerator we have Pretax operating profit or operating income.In the absence of non-operating income, operating income agrees with EBIT; otherwise, it can be derived from EBIT by subtracting non-operating income.

Capital Employed

In the denominator we have net assets or capital employed instead of total assets (which is the case of Return on Assets). Capital Employed has many definitions. In general it is the capital investment necessary for a business to function. It is commonly represented as total assets less current liabilities or fixed assets plus working capital.

ROCE uses the reported (period end) capital numbers; if one instead uses the average of the opening and closing capital for the period, one obtains Return on Average Capital Employed (ROACE).

Application

ROCE is used to prove the value the business gains from its assets and liabilities, a business which owns lots of land but has little profit will have a smaller ROCE to a business which owns little land but makes the same profit.

It basically can be used to show how much a business is gaining for its assets, or how much it is losing for its liabilities.

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, possibly better businesses. In addition, while cash flow is affected by inflation, the book value of assets is not. Consequently revenues increase with inflation while capital employed generally does not (as the book value of assets is not affected by inflation).

See also

*Cash flow return on investment (CFROI)
*Return on Operating Capital (ROOC)
*Return on Invested Capital (ROIC)
*Return on Equity (ROE)
*Return on Assets (ROA)

*Economic Value Added (EVA)
*Cash Surplus Value Added (CsVA) index

References

Wikimedia Foundation. 2010.

### Look at other dictionaries:

• return on capital employed — (ROCE) Measures the operating profit of a company as a percentage of capital employed and so gives a measure of overall efficiency in using available resources to generate profit. Practical Law Dictionary. Glossary of UK, US and international… …   Law dictionary

• 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… …   Financial and business terms

• Return on Capital Employed — Der Return on Capital Employed (ROCE) ist eine betriebswirtschaftliche Kennzahl die misst, wie effektiv und profitabel ein Unternehmen mit seinem eingesetzten Kapital umgeht und stellt quasi eine Weiterentwicklung der Gesamtkapitalrentabilität… …   Deutsch Wikipedia

• Return on capital employed — Le ROCE (Return On Capital Employed) est utilisée dans le domaine de la finance pour mesurer le retour qu une compagnie réalise en fonction des capitaux investis. Il est habituellement utilisé pour comparer la performance entre business et pour… …   Wikipédia en Français

• Return On Capital Employed - ROCE — A ratio that indicates the efficiency and profitability of a company s capital investments. Calculated as: ROCE should always be higher than the rate at which the company borrows, otherwise any increase in borrowing will reduce shareholders… …   Investment dictionary

• return on capital employed — ROCE An accounting ratio expressing the profit of an organization for a financial period as a percentage of the capital employed. It is probably one of the most frequently used ratios for assessing the performance of organizations. In making the… …   Accounting dictionary

• return on capital employed — ROCE An accounting ratio expressing the profit of an organization for an accounting period as a percentage of the capital employed. It is one of the most frequently used ratios for assessing the performance of organizations. In making the… …   Big dictionary of business and management

• return on capital employed — /rɪ tɜ:n ɒn kæpɪt(ə)l ɪm plɔɪd/, return on assets /rɪˌtɜ:n ɒn æsets/, return on equity /rɪˌtɜ:n ɒn ekwɪti/ noun a profit shown as a percentage of the capital or money invested in a business. Abbreviation ROCE, ROA, ROE …   Dictionary of banking and finance

• Capital employed — has many definitions and is not easily analysed. In general, it represents the capital investment necessary for a business to function. Consequently, it is not a measure of assets, but of capital investment: stock or shares and long term… …   Wikipedia

• Return on capital — Return on invested capital (ROIC) is a financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business. It is defined as Net operating profit less adjusted taxes divided by Invested …   Wikipedia

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