Return on capital employed (ROCE) ratio and formula

Return on capital employed (ROCE) is the ratio which measures the relationship between the size of the profit figure relevant to the size of the business.

The return on capital employed formula is:

ROCE is also known as the primary ratio because it’s often the most important measure of profitability. Once calculated, ROCE should be compared with:

1. previous years’ figures
2. company’s target ROCE
3. the cost of borrowings: if the cost of borrowing is higher than ROCE, further borrowings will reduce earnings per share
4. other companies in the same industry.

Return on capital employed can be calculated in a number of different ways.

The return on shareholders’ equity ratio is more relevant for existing or prospective shareholders than management.

The other commomly used ROCE is:

The overall return ratio is used by managers assessing performance.

Related posts:

1. Return on capital employed(ROCE)
2. Quick ratio vs current ratio
3. Current ratio analysis
4. Equity to assets ratio
5. Inventory turnover formula