Return on capital employed (ROCE) is a ratio that is used to measure how much a company gets for the cost of its capital. This shows whether the company is obtaining a decent profit for the amount of capital it owns. The higher the ratio, the better the company is. To calculate the return on capital employed, you need to know the total assets, current liabilities, revenue and operating expenses.
Subtract the operating expenses from the revenue to get the company's earnings before interest or tax (EBIT). As an example, take a company that has £6,500 in assets, £1,300 in liabilities, £3,250 in revenue and £1,950 in operating expenses. Subtracting operating expenses from revenue is £3,250 - £1,950 = £1,300. The EBIT for the example is £1,300.
Subtract the value of liabilities from the value of all assets to get capital employed. Continuing the example: Assets -- Liabilities = £6,500 - £1,300 = £5,200.
Divide the EBIT by the result from Step 2 to get the ROCE. Finishing the example: £1,300 / £5,200 = 0.25.
Reducing capital investments can increase a company's ROCE value but may not indicate an actual increase in profitability.
Tips and warnings
- Reducing capital investments can increase a company's ROCE value but may not indicate an actual increase in profitability.