7.2 Return on capital Employed (ROCE)

What is ROCE used for ?

• used to measures how efficiently a business manages its finance

  

How is ROCE calculated ?

ROCE = operating profit x capital employed x 100

List examples of non current liabilities

• Bank loans, long term debts, debentures, mortgages

How is total equity calculated ?

Retained profits + Share capital

What does it mean if a business has a high ROCE?

• The higher the ROCE the better.

• means that the company is efficiently using its capita; to generate profits.

To ensure ROCE is normal what can it be compared to?

• ROCE should be compared to previous years

  • ROCE should be compared to industry rivals/industry average

How to improve ROCE?

• ensure that operating profit increases faster than capital employed

• decrease capital employed but maintain operating profit - this will happen naturally as non current liabilities (bank loans) decrease over time - assuming that the business does not take up more debt