Return on Capital Employed Calculation

The Return on Capital Employed (ROCE) is used as a measure of the net profit generated from the long-term capital invested in the firm. The ratio is expressed in percentage terms as follows:

ROCE = [(Net profit before interest and taxation) / (Share capital + reserves + long term loan)] *100%

Learn how to calculate ROCE with the following example:

COO Ltd has the following information:
$1 Ordinary Shares: $200,000
General reserve: $50,000
Retained profit: $30,000
10% Debentures $60,000
Gross profit: $120,000
Salaries: $25,000
Rates: $5,000
Insurance: $6,000
Heat and light: $4,000
Audit fees: $8,000
Depreciation of Furniture: $1,000
Interest payable: $500

Required: Calculate the ROCE for COO Ltd.

Solution:
Total expenses (excluding interest payable) = 25,000 + 5,000 + 6,000 + 4,000 + 8,000 + 1,000 = $49,000
Net profit before interest and taxation = Gross profit - Total expenses = 120,000 - 49,000 = $71,000
Capital and reserves = Ordinary Shares + General reserve + Retained profit = 200,000 + 50,000 + 30,000 = $280,000
ROCE = [ 71,000 / (280,000 + 60,000) ] * 100% =  20.88%

* Next: Return on Assets (ROA) Ratio