Return On Capital Employed
Return on Capital Employed, or ROCE, is a financial ratio that measures the profitability of a company by comparing its earnings to its capital invested in the business. This ratio is important for investors and analysts as it provides insight into how efficiently a company is using its capital to generate returns.
To calculate ROCE, the formula is as follows:
ROCE = (Net Income / Capital Employed) * 100
Net income is the profit a company makes after deducting all expenses, including taxes, from its revenue. Capital employed is the total amount of capital invested in the business, including long-term debt and equity.
A high ROCE indicates that a company is using its capital efficiently and generating a good return on investment. On the other hand, a low ROCE may indicate that the company is struggling to generate profits and may need to improve its capital management.
ROCE can be compared to the industry average to see how a company stacks up against its competitors. It can also be compared to the cost of capital, which is the rate of return that investors expect to receive on their investment. If the ROCE is higher than the cost of capital, it means that the company is generating a return above what investors expect.
ROCE is a useful metric for investors and analysts to evaluate the profitability and efficiency of a company. It provides insight into how well the company is using its capital to generate returns and can be used to compare a company to its competitors and the industry average.