Formula to Calculate ROCE
Return on Capital Employed (ROCE) is a type of financial formula that measures a firm’s profitability and how efficiency its capital is made use. In different words, this ratio measures how the firm can generate profits from the capital that it has employed, which includes both debts as well as equity.
The formula is represented as follows,
 ROCE is considered as a profitability ratio and longterm as it depicts how effectively the assets of the firm are performing when one takes into account financing, which is longterm.
 This Ratio is widely used by investors for the screening of stocks and shortlisted them based upon comparison with the benchmark that could be the industry average.
 When the analyst performs a comparison among capital intensive sectors like telecoms and utilities etc. Rising ROCE number is an indicator of good management as they are increasing the returns, and the capital is effectively being utilized.
Explanation
This ratio is depended on 2 important things: capital employed and operating profit. EBIT or Net operating profit is often reported on the profit and loss statement as it depicts the firm profits generated from its operations.
 Operating profit can be calculated by adding taxes and interest back into net profit.
 Capital employed is a broader term as it can refer to several financial ratios. Commonly, capital employed can be referred to as the total assets of a firm after accounting for all the short term or current liabilities.
Hence, this figure depicts how well the internal as well as external sources of finance are employed by the firm.
Examples of ROCE Formula (with Excel Template)
Let’s see some simple to advanced examples of the ROCE equation to understand it better.
Example #1
ABC Limited has reported an operating profit of $40,000 and with total assets of $1,000,000, and its liabilities, which are short term, were reported $150,000. Based on the given information, you are required to calculate ROCE.
Solution:
Use below given data for the calculation of return on capital employed.
Calculation of ROCE can be done as follows:
EBIT is nothing but operating profit, which is $40,000, and capital employed is total assets less current liabilities, which in this case is $1,000,000 less $150,000, which equals to $850,000
Therefore, ROCE = $40,000 / $850,000 * 100
Return on Capital Employed will be –
Example #2
Company X has reported the below figures:
Based on the above information, you are required to calculate ROCE.
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Solution:
The Capital employed can be calculated as per below:
Capital Employed = 500000 + 600000 + 200000
Capital Employed = 1300000
Calculation of return on capital employed (ROCE) can be done as follows:
ROCE = 90,000 /1300000
Return on Capital Employed will be –
Example #3
Extracts from Kenzo Limited’s income statement are per below:
Assume capital employed 80,000,000. You are required to calculate ROCE.
Solution:
Operating Profit can be calculated per below:
Operating Profit = 10500000 – 2000000 – 3500000
Operating Profit = 5000000
Calculation of return on capital employed (ROCE) can be done as follows:
ROCE = 5000000 / 80000000
Return on Capital Employed will be –
Example #4
B limited has reported 25% ROCE, and A limited has reported 30% ROCE. Assuming that the operating profit ratio is the same for both of the firms, you are required to comment as to which firm is performing better?
Solution:
It has been given that the operating profit ratio is the same for both of the firms, which means they are almost at par while generating operating profit from revenue and appear to be that they belong to a similar industry. One ratio that differs is ROCE, and for the firm that has reported higher, ROCE can be concluded to be performing better. Firm A appears to be employing the funds better than firm B, and it also appears that firm A has comparatively less capital employed than firm B.
Example #5
Does the ROCE trend indicate anything if the firm is reporting 20%, 22%, 25%, 28%, and 28.90%, respectively, for its consecutive reporting periods?
Solution:
ROCE is one of the key ratios for measuring the profitability ratio, and it is a good indicator when the ratio shows a positive and increasing trend. This would mean that the firm is successful in employing the capital and is quite efficient in running the company.
Example #6
PQR has reported quarterly figures along with last quarter comparison; you are required to assess how the company has performed?
Solution:
Calculation of return on capital employed (ROCE) for the current quarter can be done as follows:
Return on Capital Employed = 125000 / 500000
Return on Capital Employed for the current quarter will be –
Calculation of return on capital employed for the previous quarter can be done as follows:
Return on Capital Employed = 115000 / 450000
Return on Capital Employed for the previous quarter will be –
It appears there is a slight decrease in ROCE, which might appear to be inefficient, but there is also an increase in absolute operating profit and absolute employment of funds and hence based on the above whole comparison, it appears the firm has actually performed well despite a small decrease in ROCE.
How to Use the ROCE Formula?
Investors or the street analyst are always interested in the ratio to check how efficiently a firm is using its capital employed along with its longterm financing goals and strategies. The firms’ returns should always exceed the rate at which the firms are borrowing to fund their projects or the assets in use. If the firms borrow say at 10 % and can only achieve a return of 7 %, this would mean that they are not increasing the wealth of the stockholders but are losing the money.
Things to Remember
When one is calculating ROCE, make sure while calculating capital employed, all the sources of finance are considered into account and only excluding the short terms means of finance like current payables, overdrafts, etc. Also, while making a comparison with peer firms, make decisions based on other parameters as well, not just this sole ratio. Banks, Insurance companies, etc. are not a capital intensive business and hence this ratio is of much not use while analyzing those sectors.
ROCE Calculator
You can use this ROCE equation calculator.
EBIT  
Capital Employed  
Return on Capital Employed (ROCE)  
Return on Capital Employed (ROCE) = 


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