ROCE

What is Return on Capital Employed (ROCE)?

ROCE is a measure of relative profitability that shows what returns (profits) a business has made on the resources available to it.

What does ROCE help evaluate?

ROCE helps evaluate overall business performance, provide target returns for projects, and benchmark performance with competitors.

What information do you need to calculate ROCE?

You need the Operating Profit (or Net Profit) from the Income Statement and Total Equity + Non-Current Liabilities from the Statement of Financial Position (Balance Sheet).

What is the formula for ROCE?

ROCE (%) = (Operating Profit ÷ (Total Equity + Non-Current Liabilities)) × 100

Given Company X data: Non-Current Liabilities = 500, Share Capital = 1,000, Reserves = 250, Operating Profit = 400, calculate ROCE.

Total Equity = 1,250; ROCE = 400 ÷ (1,250 + 500) × 100 = 22.8%

Given Company Y data: Non-Current Liabilities = 700, Share Capital = 1,000, Reserves = 1,500, Operating Profit = 600, calculate ROCE.

Total Equity = 2,500; ROCE = 600 ÷ (2,500 + 700) × 100 = 18.7%

Why is ROCE an important measure?

ROCE varies between industries and is particularly important in capital-intensive industries with significant amounts of capital employed.

What is ROCE based on?

ROCE is based on a snapshot of a business' balance sheet.

What should you consider when comparing ROCE?

Comparisons over time and with key competitors are the most useful.