Return on Capital Employed (ROCE) Ratio

Definition: Return on Capital Employed (ROCE) is a financial ratio used to measure the profitability of a firm. It indicates the efficiency of the capital utilized to generate earnings. ROCE is also known as "Return on capital invested" or "Percentage return on capital".

Formula:
Return on Capital Employed = (Profit before interest/Capital employed) * 100%
Or,
ROCE = (Profit before interest and tax/Long term capital) * 100%

Note: Capital employed (or Net Worth) = Total Assets less current liabilities

Example 1:
Following is a section of the balance sheet for Company ABC. Calculate the ROCE.

Financed by:
Capital at start            82,000
Add Net profit           18,000
Less Drawings            20,000
Capital at end              80,000

Solution:
Average capital employed = (Capital at start + Capital at end) / 2 = (82,000 + 80,000) / 2 = $81,000
Return on Capital Employed = (18,000 / 81,000) * 100% = 22.22%

Example 2:
The following information relates to Adel Ltd. as at 31 December 2010:
Total assets $89,000
10% Debentures $33,000
Ordinary shares of $1 each: $70,000
5% Preference shares of $1 each: $20,000
Reserves $18,000
Profit before interest and tax $60,000
Calculate the ROCE.

Solution:
Long term capital = Share capital + Reserves + Debentures = 70,000 + 20,000 + 18,000 + 33,000 = $141,000
ROCE = (60,000 / 141,000) * 100% = 42.55%

* Next: Operating Ratio Formula & Example
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Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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