This is an in-depth guide on how to calculate Return on Capital Employed (ROCE) ratio with detailed analysis, interpretation, and example. You will learn how to use its formula to assess a firm's profitability.
Definition - What is Return on Capital Employed Ratio?
One of the many tools you can use to measure a company’s profitability is the return on capital employed or ROCE ratio.
This ratio compares a firm’s net earnings from operations to the amount of its capital employed, in order to determine how much profit is being generated from each dollar of that capital.
The capital employed figure indicates the amount of capital investment that’s needed for a particular business to operate successfully.
In other words, it represents the combined amount of a company’s shareholder equity, plus its long-term liabilities.
Because it considers a company’s long-term debt obligations, the ROCE ratio takes a longer view of the firm’s continued financial viability.
Instead of simply giving you a picture of how efficiently the firm’s current assets or shareholder investment is producing a profit, the ratio gauges profit performance based on both equity and debt.[Click to continue]