Return on Capital Employed (ROCE) is a financial ratio that measures how efficiently a company uses all its capital — both equity and debt — to generate profits.
ROCE Formula
ROCE = (EBIT / Capital Employed) × 100
Capital Employed = Total Assets - Current Liabilities = Shareholders' Equity + Long-term Debt
Example
If a company has EBIT of ₹15 crore and capital employed of ₹100 crore, its ROCE is 15%. This means the company generates a 15% return on every rupee of capital invested.
Why ROCE Is Important
- It accounts for both equity and debt, unlike ROE
- It shows how well a company uses all its capital
- A ROCE above 15% is generally considered good
- It is especially useful for capital-intensive industries
ROCE vs ROE
ROE only considers equity, while ROCE considers all capital. A company with high ROE but low ROCE may be using too much debt to boost returns — a red flag for investors.
How to Use ROCE
Compare ROCE across companies in the same industry. Look for consistent ROCE over several years, not just a one-time spike.
Disclaimer: This article is for educational purposes only.