Return on Average Capital Employed Formula

Formula to Calculate Return on Average Capital Employed (ROACE)

Return on Average Capital Employed (ROACE) is an extension of the ratio Return on Capital Employed and instead of the total capital at the end of the period, it takes an average of the opening and the closing balance of capital for a period of time and is calculated by dividing the Earning before interest and taxes (EBIT) by Average total assets minus all the liabilities.

Return-on-Average-Capital-Employed-Formula

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For eg:
Source: Return on Average Capital Employed Formula (wallstreetmojo.com)

Also, check out this detailed article on ROCEROCEReturn on Capital Employed (ROCE) is a metric that analyses how effectively a company uses its capital and, as a result, indicates long-term profitability. ROCE=EBIT/Capital Employed.read more

Explanation

In the above ratio, we have two parts.

Example

Let’s take a simple example to illustrate the ROACE formula.

Benefits Inc. has the following information –

  • EBIT for the year – $30,000
  • The beginning capital employed – $540,000
  • The ending capital employed – $450,000

Find out the ROACE.

First, we need to find out the average capital employed.

All we need to do is to do a simple average.

  • Average Capital Employed = ($540,000 + $450,000) / 2 = $990,000 / 2 = $495,000.
  • ROACE formula= EBIT / Average Capital Employed
  • Or, ROACE formula = $30,000 / $495,000 = 6.06%.

Nestle Return on Average Capital Employed

Below is the snapshot of Nestle’s Income Statement and Balance Sheet. For calculating ROACE, we require EBIT or the Operating profit.

Consolidated income statement for the year ended 31st December 2014 & 2015

Nestle - ROCE - Income Statement
Nestle - ROCE - Balance Sheet

source: Nestle Annual Report

Here three figures are important, and all of them are highlighted. First is the Operating Profit for 2014 and 2015. And then, the total assets and total current liabilities for 2014 and 2015 are needed to be considered.

  • Operating Profit of 2015 = CHF 12,408
  • Capital Employed (2015) = 123,992 – 33,321 = 90,671
  • Capital Employed (2014) = 133,450 – 32,895 = 100,555
  •  Average Capital Employed = (90,671 + 100,555)/2 = 95,613
  • ROACE = CHF 12,408 / 95,613 = 12.98%

Uses

  • Return on average capital employed is best used for capital-intensive industries.
  • For companies that need a lot of capital up front to start and run the business are capital intensive industries. For capital-intensive industries, the ROACE would be lower.
  • In other cases (if the company is not capital intensive), the ROACE should be higher.
  • An investor should be careful about capital assets. It may so happen that these capital assets are depreciated, and as a result, the ROACE has been higher. But it is not because the profit is higher; rather, the ROACE is lower.

Return on Average Capital Employed Calculator

You can use the following calculator.

EBIT
Average Capital Employed
ROACE Formula
 

ROACE Formula =
EBIT
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Average Capital Employed
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Return on Average Capital Employed in Excel (with excel template)

Let us now do the same example above in Excel. This is very simple. First, you need to find out the average capital employed, and you need to provide the two inputs of Ebit and Average Capital Employed.

You can easily calculate the ratio in the template provided.

Return on Average Capital Employed in Excel

You can download this template here – Return on Average Capital Employed Excel Template.

Return on Average Capital Employed Formula Video

 

Recommended Articles

This has been a guide to return on average capital employed formula, its uses along with practical examples. Here we also provide you with ROACE Calculator with a downloadable excel template. Learn more from the below articles –