Return on capital employed
What is return on capital employed?
Return on capital employed (ROCE) is a profitability ratio that measures how well a company uses its equity and debt to generate a return.
It shows investors how many pounds in profits are generated from each pound of capital employed, which is the amount of investment needed for a business to function.
Where have you heard about return on capital employed?
It’s sometimes referred to as the 'primary ratio' and can be used to compare the financial health of similar businesses. As an investor, you may have used this ratio to determine the profitability of a business you’re considering investing in.
What you need to know about return on capital employed.
To calculate return on capital employed you divide the earnings before interest and tax (EBIT) by the capital employed.
The higher the ratio, the more efficiently the company is running. If it’s lower than the level of capital employed, the return to shareholders is likely to be low.
Return on capital employed is considered to be a good measure for evaluating the longevity of a company as it shows how effectively assets are performing against long-term financing.
Find out more about return on capital employed.
You can also measure a company’s financial health by calculating the return on equity, return on tangible equity and return on net assets.