What is ROCE (Return on Capital Employed)?
ROCE, short for Return on Capital Employed, is a financial metric used to assess the efficiency and profitability of a company's capital utilization. It helps investors and analysts evaluate how well a company generates profits from the money it has invested.
How to Calculate ROCE?
To calculate ROCE, you divide the company's operating profit (or earnings before interest and taxes, EBIT) by its capital employed (Total Assets - Total Liabilities) and express the result as a percentage. The formula is as follows:
ROCE = (EBIT / Total Assets - Total Liabilities) x 100
EBIT (Earnings Before Interest and Taxes) is a measure of a company's operating profit before deducting interest expenses and taxes. It indicates the profitability of a company's core operations, excluding the impact of financial costs and tax obligations.
Capital Employed refers to the total amount of money invested in a company to support its operations, including both equity and debt. It is typically calculated by subtracting the company's liabilities from its total assets or by adding its fixed assets to the working capital.
In simple terms, it represents the amount of money the company has invested in its business to make it run smoothly and generate profits.
Interpreting ROCE Ratio
A high ROCE means a company is using its money wisely and making good profits compared to its investments. It shows that the company is efficient and gives good returns to its investors.
On the other hand, a low ROCE means the company is not making enough profits with the money it has invested. This could mean the company needs to improve how it operates or allocate its resources more effectively.