Return on Capital Employed is

$$Return\quad on\quad Capital\quad Employed=$$$$\frac { Operating\quad Profit(EBIT) }{ Capital\quad Employed }$$

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**a type of Profitability Ratio**that determines the**Profit of a company relative to Capital Employed in a company.**It is a measure of how efficiently a company is using the Capital to create profit.$$Return\quad on\quad Capital\quad Employed=$$$$\frac { Operating\quad Profit(EBIT) }{ Capital\quad Employed }$$

**Operating Profit or EBIT (Earnings Before Interest and Taxes) = Net Sales – (Operating Expenses + Cost of Goods Sold)Where,****And Capital Employed = Total Assets – Current Liabilities or Equity + Non-Current Liability**__Return on Capital Employed (ROCE) multiplied by 100 provides the ROCE in percentage terms.__

## Significance and Interpretation

- Return on Capital Employed (ROCE) is an important indicator of the profitability of a company, unlike other profitability ratios
**it considers the profit with respect to equities as well as liabilities**. Higher ROCE attracts investors to invest in a company. **High ROCE**implies that the**Capital of a company are well utilized**to generate profits whereas a**low ROCE**implies**underutilization of the Capital of the Company**. Hence,**a high ROCE attracts investors.**

### Examples

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**Example 1: **

**Given below are few details of M/S XYZ Ltd., use them an calculate the Return on Capital Employed for M/S XYZ Ltd.**Particulars | Amount (in Rs.) |
---|---|

Equity Share Capital | 4500000.00 |

Reserves and Surplus | 1500000.00 |

Long Term Debts | 500000.00 |

Short Term Debts | 1000000.00 |

Operating Profit | 1500000.00 |

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**Solution:**

**Operating Profit (EBIT) =**Rs. 1500000.00**Capital Employed =**Equity Share Capital + Reserves and Surplus + Long Term Debts**⇨**Rs. 6500000.00**ROCE =**EBIT / Capital Employed = 1500000 / 6500000**⇨**3 / 13

**Hence, ROCE = 3/13 or 0.2307 or 23.07%**