ROIC vs ROCE

Difference Between ROIC and ROCE

Return on Capital Employed (ROCE) is a measure implies the long term profitability and is calculated by dividing earnings before interest and tax (EBIT) to capital employed, capital employed is the total assets of the company minus all the liabilities, while Return on Invested Capital (ROIC) measures the return the company is earning on the total invested capital and helps in determining the efficiency in which the company is using the investors funds to generate additional income.

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Return on Invested Capital (ROICROICReturn on Invested Capital (ROIC) is a profitability ratio that shows how a company uses its invested capital, such as equity and debt, to generate profit. The reason this ratio is so crucial for investors before making an investment is that it helps them decide which firm to invest in.read more) and Return on Capital Employed (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) come under profitability ratios that go beyond determining just the profitability of the company. These ratios also help understand how the company is performing and help assess how much of profits made are returned to investors. Both these ratios specifically examine how a company utilizes its capital to invest and grow further. ROIC, along with ROCE and other ratios, are helpful to analysts in assessing a company’s financial condition and forecast the future ability to generate profits.

Both these ratios help in determining how efficiently the company uses the invested capitalInvested CapitalInvested Capital is the total money that a firm raises by issuing debt to bond holders and securities to equity shareholders. Invested Capital Formula = Total Debt (Including Capital lease) + Total Equity & Equivalent Equity Investments + Non-Operating Cash read more and are very similar and have few differences, mainly in the way these ratios are calculated.

ROIC vs. ROCE Infographics

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Key Differences

ROIC vs. ROCE Comparative Table

ROICROCE
ROIC helps determine the efficiency of the total capital invested. It is a measure that helps determine if the company is allocating the capital in profitable investments.ROCE can be considered as a measure to inspect the efficiency of the companies business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation.read moreBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation.read moreBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation.read more and measures the profits the company generates with the capital employed
ROIC FormulaROIC FormulaROIC (Return on Invested Capital) Formula is a profitability and performance ratio that is determined based on the total cost and the return generated. Returns are the entire net operating profit after tax, while investments are determined by subtracting all current liabilities from its assets.read moreROIC (Return on Invested Capital) Formula is a profitability and performance ratio that is determined based on the total cost and the return generated. Returns are the entire net operating profit after tax, while investments are determined by subtracting all current liabilities from its assets.read moreROIC (Return on Invested Capital) Formula is a profitability and performance ratio that is determined based on the total cost and the return generated. Returns are the entire net operating profit after tax, while investments are determined by subtracting all current liabilities from its assets.read more – Earnings before interest and tax (EBIT)*(1-tax rate) / Invested CapitalROCE Formula – (Earnings before interest and taxInterest And TaxEarnings before interest and tax (EBIT) refers to the company's operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization's profit from business operations while excluding all taxes and costs of capital.read moreEarnings before interest and tax (EBIT) refers to the company's operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization's profit from business operations while excluding all taxes and costs of capital.read moreEarnings before interest and tax (EBIT) refers to the company's operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization's profit from business operations while excluding all taxes and costs of capital.read more (EBIT) / Capital Employed). To be consistent, the numerator and denominator are taken before interest and tax.
Invested capital is a subset of capital employed and is the portion of the capital that is actively used in the business. Invested Capital can be calculated as = Fixed Assets + Intangible Assets + Current AssetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read moreCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read moreCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more – Current LiabilitiesCurrent LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc.read moreCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc.read moreCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc.read more – Cash.Capital employed in the denominator is calculated as (Debt + Equity – current liabilities). It implies all the capital that is part of the business.
This ratio is essential from the perspective of an Investor.This ratio is essential from the perspective of the Company.
ROIC helps in assessing the companies performance within its sector. Cross-sector comparisons using ROIC may not be meaningful. For example, comparing an energy company with IT. It compares the productivity of its operating assets.ROCE looks at the long-term view of the company and assesses the ability of the managers. It penalizes the management if ROCE holds too much cash for too long. The trend of ROCE is significant.

Conclusion

ROIC and ROCE are similar only with slight differences. These are vital ratios that help comparisons between companies and help in determining the companies graphs using the past year’s ratios. Both ratios can be helpful in comparing companies that are capital intensiveCapital IntensiveCapital intensive refers to those industries or companies that require significant upfront capital investments in machinery, plant & equipment to produce goods or services in high volumes and maintain higher levels of profit margins and return on investments. Examples include oil & gas, automobiles, real estate, metals & mining.read more, for example – energy, telecommunication, and auto companies. These measures have limited use when it comes to service-based companies.

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