Introduction to ROCE
Companies and businesses use a lot of financial tools to help them understand the company’s progress and calculate their profit and losses. Such tools are also useful to the investors as they help the investors to decide if a company is good enough to invest in. Return on capital employed or ROCE is one such financial tool.
What is Return On Capital Employed or ROCE?
Return On Capital Employed or ROCE is used to measure the profitability of a company. ROCE is a profitability ratio which measures the company’s profitability. This is done by measuring how the company is working and using its capitals to generate maximum profits.
Companies as well as their potential investors may use the return on capital employed or ROCE profitability ratio to determine the profitability of the company. While the companies use this as a part of their progress analysis, the investors use this to contemplate whether or not to invest in the company and how profitable it will be for them if they decide to invest.
ROCE is not the only financial ratio which is used to measure the profitability of a company, but it is one of the most reliable and is popularly used by companies and investors. This ratio is also used to compare profitability across companies.
How is Return On Capital Employed or ROCE calculated?
The main two components that are required to calculate return on capital employed or ROCE are earnings before interest and tax and capital employed. Considering these two components, the formula used to calculate ROCE is as follows:
ROCE = EBIT / Capital Employed
Where, ROCE = Return On Capital Employed EBIT = Earnings Before Interest Capital Employed = Total Assets − Current liabilities ROCE proves to be very beneficial for the companies to keep a record of their progress on grounds of profit. It is also beneficial when comparing the performances of two different companies.
