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