Return on Capital Employed (ROCE)

Return on Capital Employed is 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

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

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%