Return on capital employed (ROCE)

Category:Ratios
Alternative names: ROCE

What is return on capital employed

Return on Capital Employed (ROCE) is a profitability ratio that measures how efficient a company is at using its capital to generate profits and use its capital efficiently.

How to calculate return on capital employed (formula)

ROCE is calculated by taking into account the total capital that the company has at disposal and the returns that the company generates over the specify time frame. For returns we usually use EBIT that is representative of the company’s profit, including all expenses except interest and tax expenses. For the capital employed we use the company Total Assets minus the current liabilities which can also be seen as shareholders’ equity plus long-term debt.

ROCE = EBIT / Capital Employed

where:

Capital Employed = Total assets − Current liabilities

What is a good return capital employed number

ROCE is an efficiency ratio and therefore the higher the ratio the more efficient the company at using its capital. The ROCE indicates how much operating profits is generated for each dollar of capital invested in the company.

Stocks with high ROCE

Name Return on capital employed Marketcap Industry
SPGI S&P Global Inc 43.9% $84.59B Financial Data & Stock Exchanges
PM Philip Morris International Inc 43.8% $121.59B Tobacco
HD Home Depot Inc 42.6% $296.23B Home Improvement Retail
IDXX Idexx Laboratories Inc 41.8% $30.17B Diagnostics & Research
MA Mastercard Inc 40.5% $335.62B Credit Services

Why is return on capital employed important

ROIC is important metric that a lot of investors and analysts use to assess the quality and efficiency of a business. ROCE is especially useful to investors when analysing the performance of companies in capital-intensive sectors (like utilities, mining, telecoms etc). It’s important to notice that since ROCE uses book value of assets there might be some distortions in the way ROCE is affected over time. For example deprecation assets on the balance sheet will increase the ROCE even though the profitability stays the same. Conversely in higher inflation environments, inflation will affect the earnings but will not have an effect on the book value of assets so it might have similar effect on ROCE.

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