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Return on capital employed definition

Description

Return on capital employed (ROCE) indicates the profitability of a company's capital employed (capital investments). Capital employed equals long term debts plus shareholder’s equity. Data to calculate this ratio is collected from the income statement and balance sheet.

Return on capital employed is similar to the return on equity (ROE) ratio. Only the ROCE evaluates long term debts, and while calculating ROE such value is not included. ROCE is important to investors, as it indicates how the use of financial leverage affects company’s profitability.

Norms and limitations

It is reasonable to assume that ROCE should be higher than the rate, at which the company borrows.

It is a must to pay attention to the cost of borrowing as it decreases the owner’s profit. The cost of borrowing depends on the current situation in the financial market.

Formula

Net income (net profit, net earnings) usually called “the bottom line” is a measure which is calculated by taking revenues (sales and other incomes) and adjusting them to the cost of sales, operating cost, depreciation and amortization, interest, taxes and other expenses.

Capital employed is calculated by adding shareholder’s equity to long term debts or by subtracting current liabilities from total assets.

In many cases, instead of capital employed for the ending of period, average capital employed per period can be used.