What is ROFE?
ROFE =
EBIT / Capital Invested
(book value)
•A financial performance metric, ROFE captures a simple relationship
•Ratio of EARNINGS created from the book value of capital invested
•Using EBIT, does not capture net operating cash flo
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•Uses Book value (depreciated value) of capital investments
• If capital assets are depreciated, they appear to create a cash flow
• Depreciation is an Accounting Expense not a Cash Flow.
• Artificially biases long-term asset-intensive projects, as they have
bigger apparent depreciation cash flows
•Does not capture the time value of money; interest and inflation
ROFE is not a tool to evaluate capital projects. Even used as a
metric to compare capital earnings performance, has flaws.