What is Return on Capital Employed (ROCE)?

Full Definition

Return on Capital Employed (ROCE) is calculated as operating profit (earnings before interest and tax) divided by capital employed (total assets minus current liabilities, which broadly represents the long-term funding -- equity plus long-term debt -- tied up in the business), expressed as a percentage. It answers a different question from return on equity: rather than measuring the return to shareholders alone, ROCE measures how efficiently the business uses all the capital available to it, including debt, to generate operating profit, which makes it useful for comparing capital-intensive businesses (such as manufacturing, infrastructure or property) where the mix of debt and equity funding can vary a lot between similar companies. A higher ROCE generally indicates a more efficient use of capital, and analysts often compare a company's ROCE against its cost of capital (roughly, the average interest rate on its debt and the return shareholders expect) -- a business persistently earning ROCE below its cost of capital is arguably destroying rather than creating value even if it is nominally profitable. ROCE trends over time and comparisons against sector peers are usually more informative than a single year's figure in isolation, since capital employed can be temporarily distorted by one-off asset purchases, disposals or write-downs.

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