Return on Capital Employed Calculator
Calculate ROCE
Measure how efficiently a company uses its capital to generate profits.
Return on Capital Employed:
0.00%
EBIT (Operating Profit): $
Total Assets: $
Current Liabilities: $
Capital Employed: $
ROCE: %
Industry Comparison:
| ROCE Range | Interpretation | Typical Industries |
|---|---|---|
| 15%+ | Excellent | Technology, Pharmaceuticals |
| 10-15% | Good | Consumer Goods, Services |
| 5-10% | Average | Manufacturing, Retail |
| Below 5% | Poor | Capital-intensive industries |
ROCE measures how efficiently a company uses its capital to generate profits. Higher ROCE indicates better capital utilization.
What is Return on Capital Employed (ROCE)?
Return on Capital Employed (ROCE) is a financial ratio that measures a company's profitability and the efficiency with which its capital is employed. It indicates how well a company is generating profits from its capital.
ROCE is particularly useful for comparing the performance of companies in capital-intensive industries such as manufacturing, utilities, and telecommunications. It's considered one of the best profitability ratios as it considers both debt and equity financing.
ROCE Formula
The formula for calculating Return on Capital Employed is:
ROCE = EBIT / Capital Employed × 100%
Where:
- EBIT = Earnings Before Interest and Taxes (Operating Profit)
- Capital Employed = Total Assets - Current Liabilities
- Or alternatively: Capital Employed = Shareholders' Equity + Non-Current Liabilities
Why is ROCE Important?
ROCE is a crucial metric for several reasons:
- Capital Efficiency: Measures how effectively a company uses its capital to generate profits
- Investment Decisions: Helps investors compare companies across different industries
- Performance Benchmarking: Allows comparison with industry peers and cost of capital
- Long-term Viability: Indicates sustainable competitive advantages
- Strategic Planning: Guides capital allocation and investment decisions
Interpreting ROCE Results
ROCE should be interpreted in context:
| ROCE Range | Interpretation | Action |
|---|---|---|
| Above 15-20% | Excellent performance | Company is creating significant value |
| 10-15% | Good performance | Company is performing well |
| 5-10% | Average performance | Monitor closely |
| Below 5% | Poor performance | May not cover cost of capital |
ROCE vs Other Profitability Ratios
ROCE vs ROE (Return on Equity)
- ROCE: Considers all capital (debt + equity), better for capital-intensive businesses
- ROE: Only considers equity, can be inflated by high debt
ROCE vs ROA (Return on Assets)
- ROCE: Uses capital employed (assets minus current liabilities)
- ROA: Uses total assets, includes short-term obligations
Example Calculation:
Consider a company with the following financial data:
- EBIT: $500,000
- Total Assets: $2,000,000
- Current Liabilities: $500,000
Calculating Capital Employed:
Capital Employed = Total Assets - Current Liabilities
Capital Employed = $2,000,000 - $500,000 = $1,500,000
Calculating ROCE:
ROCE = EBIT / Capital Employed × 100%
ROCE = $500,000 / $1,500,000 × 100% = 33.33%
This ROCE of 33.33% indicates excellent capital efficiency.
Factors Affecting ROCE
- Asset Utilization: How efficiently assets are used to generate revenue
- Profit Margins: Higher margins lead to better ROCE
- Capital Structure: Mix of debt and equity financing
- Industry Dynamics: Capital requirements vary by industry
- Economic Conditions: Market cycles affect profitability
Frequently Asked Questions (FAQs)
Q: What is a good ROCE percentage?
A: Generally, ROCE above 15% is considered good, but this varies by industry. Capital-intensive industries might have lower acceptable ROCE, while technology companies often have higher ROCE.
Q: Can ROCE be higher than 100%?
A: Yes, ROCE can exceed 100% if EBIT is greater than capital employed. This typically happens in highly efficient companies with low capital requirements.
Q: How does ROCE differ from ROI?
A: ROCE measures efficiency of all capital employed in the business, while ROI (Return on Investment) typically refers to returns on a specific investment or project.
Q: Why use EBIT instead of net income in ROCE calculation?
A: EBIT is used because it represents operating profit before financing costs (interest) and taxes, making it better for comparing operating efficiency across companies with different capital structures and tax situations.
Analyze capital efficiency with Toolivaa's free Return on Capital Employed Calculator, and explore more financial tools in our Business Calculators collection.