Return on Capital Employed ( ROCE ) – Explained

ROCE is similar to ROE with few changes. In ROE we use profit after tax in the numerator but in ROCE we use Earnings Before Interest and Tax ( EBIT ) in the numerator. When it comes to denominator, in ROE we only use shareholders’ equity but in ROCE we add debt too in addition to equity. So the formula becomes,

ROCE = ( EBIT ) ÷ ( Equity + Debt )

So ROCE basically tells how much profit the company makes by utilising both shareholders’ money and loans.

However, some analysts use different formula to calculate ROCE. In the denominator we use debt, right ? But what some analysts do is they take only long term debt into consideration. If one has to get a better picture of the company then they have to consider both long term and short term debt.

Well, the aforementioned was one case. The second case is some analysts use something known as ‘Capital Employed’ in the denominator. The formula of capital employed is ‘Total Assets’ minus ‘Current Liabilities’.

Just like ROE, a greater ROCE is what investors favour. Also one should note that the difference between ROE and ROCE shouldn’t vary by a huge margin. Secondly, the value of ROCE should be greater than the interest rate at which the company is borrowing loans. In case of debt free companies we look at ROE to gauge the company.

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