Understanding return on capital employed
Return on Capital Employed (ROCE) represents a gauge of a company's profitability that considers the capital invested within the business. It's calculated by dividing a company's operating profit by its capital employed, where the operating profit is derived from the revenue minus operating expenses, and the capital employed encompasses long-term debt and shareholders' equity.
How to calculate return on capital employed
The calculation of Return on Capital Employed (ROCE) involves a formula that typically employs the company's net income divided by the capital employed, incorporating both shareholder equity and debt. This measure reveals how efficiently a company uses its capital to generate profits.
The users of return on capital employed
Return on Capital Employed (ROCE) finds utility among various entities, including businesses aiming to evaluate their capital efficiency in profit generation. It assists in performance assessments against competitors and guides resource allocation. Investors also rely on ROCE as a metric to aid investment decisions.
Considerations when calculating return on capital employed
Calculating Return on Capital Employed (ROCE) demands attention to various aspects, such as maintaining consistent definitions across compared companies, encompassing all capital, excluding exceptional items, aligning time periods, accurately calculating EBIT, and precisely computing the capital employed figure.