Return on capital employed (ROCE)

Return on capital employed or ROCE is a part of profitability ratio that calculates how effectively a company can bring in profits from its capital employed by putting into comaprison the net operating profit and the capital employed. Simply put, return on capital employed gives a picture to the investors as to how many dollars in profits each dollar of capital employed generates.

ROCE is a profitability ratio which can be considered as a long-term ratio as it shows how effeiciently assets are bein utilised while considering the long-term financing. This is the reason why ROCE is said to be a better ratio than return on equity to calculate the longevity of a company.

Formula to calculate Return on Capital Employed (ROCE)

Return on capital employed is calculated by dividing net operating profit or EBIT by the employed capital.

ROCE = Net Operating Profit/Capital Employed

Application of ROCE

The return on capital employed ratio indicates how much profit each dollar of employed capital brings in. Definitely, a higher ratio would be considered a better one because it shows that more dollars of profits are generated by each dollar of capital employed.

For example, a return of .3 shows that for every dollar invested in capital employed, the company generated 30 cents of profits.