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.

When you’re considering investing in a company, you want to feel confident that the business in question is performing effectively enough to generate the greatest returns possible, with the fewest assets.

By calculating a firm’s ROA, you can measure its net earnings against its total assets to determine just how successfully it’s using its resources to profit from its regular business operations.​

Not only will this process allow you to judge how efficient a company’s management team is at generating earnings, it can also indicate just how capable the company is of funding its own growth and expansion.

Considering the fact that the entire purpose behind a firm’s assets is to produce revenue, the return on total assets ratio should play a critical role in your evaluation of any potential investment.

Like the net profit ratio, the operating profit margin ratio, also known as net operating profit percentage, allows you to examine a company’s profitability and efficiency in more detail, where generating profits from revenues is concerned.

But while both calculations measure profits against costs, the operating margin ratio scrutinizes a narrower scope of operational and overhead expenses, excluding such costs as interest payments and taxes.

This ratio will give you a middle-of-the-road view of how effective a company is at managing and controlling its expenditures as a whole.

While less refined than including a company’s total expenses, the operating margin ratio does better reflect a firm’s ability to control overall operational costs than calculations that consider only those expenses directly related to the creation or sale of goods or services.

As a percentage measurement, the operating margin ratio shows you how much of each dollar in sales translates into profits from a firm’s regular business operations, as opposed to from other income sources, such as the sale of an asset.

When it comes to evaluating a company’s overall performance for investment purposes, the net profit margin ratio or net profit percentage is one of the most useful financial ratios.

By measuring net income against revenues, the profit margin ratio demonstrates exactly what percentage of each sales dollar remains as profit after a company’s expenses have been paid.

When you use this calculation to measure the results from a range of accounting periods, you can track the trend of a company’s financial accomplishments over a period of time.

You can also use the net profit ratio to contrast and compare the commercial performance of the business you’re interested in, with its closest competitors.

In the end, what this ratio really shows you is just how effective a business is at converting its sales into profits.

This is crucial information, since your investment dividends will rely heavily on those net earnings.