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 on Capital Employed = Operating Profit (EBIT) / Capital Employed
Where,
  • Operating Profit or EBIT (Earnings Before Interest and Taxes) = Net Sales – (Operating Expenses + Cost of Goods Sold)
  • 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%
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