Return on capital employed
ROCE
Return on capital employed measures operating profit earned on all the money running the business, equity and debt together.
Formula
Capital employed
Capital Employed = Share Capital + Total Reserves + Borrowings
ROCE
ROCE (%) = Operating Profit ÷ Capital Employed × 100
Benchmark: Use ROCE for debt-heavy companies and ROE for zero-debt ones
Reading the number
Put in ₹100 of your own equity and ₹100 borrowed from a friend, ₹200 of capital employed. End the year with ₹400 and ROCE is 100 percent.
The numerator is operating profit, before interest and tax, for a precise reason. Capital employed already includes debt in the denominator. Using net profit, which has interest already deducted, would penalise the ratio twice for the same debt. ROE uses net profit because an equity holder only cares what is left after lenders and the taxman are paid.
The rules follow from that. A zero-debt company: use ROE, because there is no interest distortion and net profit over equity gives the true final picture. A debt-heavy company: use ROCE, because ROE will flatter it.
Indian example
Related ratios
Glossary terms
From the research
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