DEFINITION OF 'RETURN ON CAPITAL EMPLOYED (ROCE)'
Return on Capital Employed (ROCE) is a financial ratio that measures a company's profitability and the efficiency with which its capital is employed. ROCE is calculated as:
RETURN ON CAPITAL EMPLOYED = Earnings Before Interest and Tax (EBIT) / Capital Employed
“Capital Employed” as shown in the denominator is the sum of shareholders' equity and debt liabilities; it can be simplified as (Total Assets – Current Liabilities). Instead of using capital employed at an arbitrary point in time, analysts and investors often calculate RETURN ON CAPITAL EMPLOYED based on “Average Capital Employed,” which takes the average of opening and closing capital employed for the time period.
A higher RETURN ON CAPITAL EMPLOYED indicates more efficient use of capital. ROCE should be higher than the company’s capital cost; otherwise it indicates that the company is not employing its capital effectively and is not generating shareholder value.
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