Return on Capital EmployedROCE
Return on capital employed (ROCE) divides operating profit (EBIT) by capital employed, usually total assets minus current liabilities. It shows how much profit a company earns on all the long-term capital it uses, and is popular for comparing capital-heavy businesses.
A company earning $100 million sounds impressive, until you learn it needed $2 billion of capital to do it. ROCE puts profit in context by asking how much each dollar of capital earns. It's widely used in the UK and Europe and works especially well for industrials, energy and utilities. This entry explains the formula, examples and how ROCE compares with ROIC.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 3 min
- Also called
- ROCE ratio, Return on capital employed ratio
- Updated
ROCE in plain words
Return on capital employed is a profitability ratio that measures how efficiently a company uses its capital to generate profits.1
ROCE divides net operating income by capital employed; ROIC uses the same numerator but a different denominator, invested capital.2
A higher ROCE is more favourable, because more profit is generated per dollar of capital employed.1
How to calculate ROCE, step by step
Find EBIT
Operating profit. See EBITDA.
Find total assets
From the balance sheet.
Subtract current liabilities
Gives capital employed.
Divide
EBIT ÷ capital employed.
Compare with cost of capital
ROCE should beat it. See Weighted Average Cost of Capital.
Track over time
Rising ROCE = improving returns.
Worked examples
Example 1 — Basic ROCE
15%EBIT $150m; total assets $1.2bn; current liabilities $200m.
| Capital employed | $1.2bn − $0.2bn = $1bn |
| ROCE | $150m ÷ $1bn = 15% |
ROCE puts operating profit against the capital employed to earn it.2
Example 2 — Comparing two firms
A is more efficientFirm A: EBIT $80m on $400m. Firm B: EBIT $120m on $1.2bn.
| Firm A ROCE | 20% |
| Firm B ROCE | 10% |
Firm B earns more in total, but Firm A generates more profit per dollar of capital, which ROCE favours.1
Example 3 — Below the cost of capital
Destroying valueROCE 6% while the cost of capital is 9%.
| Spread | 6% − 9% = −3 points |
When ROCE sits below the cost of capital, growth can destroy value rather than create it. See Weighted Average Cost of Capital.
ROCE vs ROIC vs ROE
| Aspect | Numerator | Denominator |
|---|---|---|
| ROCE | EBIT | Total assets − current liabilities |
| ROIC | After-tax operating profit | Invested capital |
| ROE | Net income | Shareholders' equity |
| See also | Return on Invested Capital | Return on Equity and Return on Assets |
How investors use ROCE
Capital-heavy sectors
Energy, industrials, utilities.
Quality screens
High, stable ROCE signals a moat. See Economic Moat.
Value creation
Compare with WACC. See Weighted Average Cost of Capital.
Trend analysis
Falling ROCE can warn of trouble.
Advantages and disadvantages
Advantages
- Includes debt and equity capital.
- Good for comparing capital-intensive firms.
- Simple to compute from statements.
Disadvantages
- Large cash piles can depress it.
- Old, depreciated assets can flatter it.
- Pre-tax measure.
Going deeper
Read as far as you need. Each level builds on the one before it.
Same numerator as ROIC
Beginner
ROCE and ROIC share an operating-profit numerator; the difference lies in the denominator.2 See Return on Invested Capital.
Total vs circulating capital
Intermediate
Capital employed reflects the total capital a business has, while invested capital reflects the capital circulating in the business.2
Adjusting for cash
Advanced
Analysts often subtract excess cash from capital employed, since idle cash lowers ROCE without saying much about the core business.
Common mistakes
Comparing across sectors
Software and steel differ massively.
Ignoring cost of capital
ROCE must beat it.
One-year snapshots
Use several years.
Missing asset age
Depreciated assets inflate ROCE.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- ROCE = EBIT ÷ capital employed.
- Capital employed = total assets − current liabilities.
- Higher ROCE means more efficient use of capital.
- Compare with cost of capital and peers.
- Close cousin of ROIC.
Frequently asked questions
What is a good ROCE?
Why use EBIT instead of net income?
Is ROCE useful for banks?
Further learning
- Return on Invested Capital
The closest relative.
- Weighted Average Cost of Capital
The hurdle ROCE must beat.
- Asset Turnover
Another efficiency measure.
- Economic Moat
What sustains high returns.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. Return on Capital Employed (ROCE) Template (opens in a new tab) Checked .
- Corporate Finance Institute. ROIC vs. ROCE (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.