Updated: Sep 19
A financial statistic called return on capital employed (ROCE) gauges a company's profitability in relation to the money that has been put in it. It is a well-liked indicator that managers, analysts, and investors use to evaluate a company's effectiveness and performance. For assessing businesses that must make major capital investments to operate, such industrial or infrastructure firms, ROCE is particularly helpful.
Learn more by watching the video and reading the blog post below:
The quantity of capital used by the company and the amount of profit it makes must be determined in order to calculate ROCE. The total amount of money invested in a business, including equity, debt, and other sources of funding, is referred to as capital employed. The long-term debt and shareholder equity of the corporation are often added together to determine this.
The formula for calculating ROCE is:
Operating Profit (or Net Profit) / Capital Employed X 100
The answer to the ROCE calculation is shown as a percentage.
Let's have a look at an example to better understand this formula. Consider a business that employs £500,000 of capital and produces an operating profit of £100,000. The ROCE can be determined using the following formula:
£100,000 (operating profit) / £500,000 (capital employed) X 100 = 20%.
This indicates that the business makes 20p in profit for every £1 invested.
Because it enables comparisons between businesses operating in the same sector, ROCE is a helpful indicator for investors. A business is more profitable per £1 invested than its rivals if it has a greater ROCE. It could also mean that a business is utilising its resources more effectively.
However, utilising ROCE as a stand-alone statistic has certain drawbacks. For instance, it does not account for changes in the capital structure of the company over time or the time value of money. Also, it might not give a thorough view of a company's financial performance and health.
In conclusion, determining ROCE is an easy technique to assess a company's productivity and profitability. While assessing the success of the company, it's crucial to combine this metric with other financial criteria and take into account its particular conditions.