Calculate ROCE from EBIT and capital employed to measure how efficiently a business generates profit from its capital base.
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Financial Analysis
Return on Capital Employed (ROCE) measures how efficiently a company generates operating profit from its total capital base. It is one of the most important profitability ratios for comparing businesses with different capital structures.
ROCE shows how many pounds of operating profit are generated per pound of capital employed. A ROCE of 12.5% means the business earns 12.5p of EBIT for every £1 of long-term capital deployed.
Unlike ROE, ROCE is capital-structure neutral because it uses EBIT (before interest) and total capital employed (equity + long-term debt). This makes it ideal for comparing companies with different leverage levels.
EBIT divided by capital employed.
ROCE = EBIT / Capital Employed × 100
Capital Employed = Total Assets − Current Liabilities. Uses EBIT (not net income) to measure operating efficiency before financing decisions.
EBIT 500,000, total assets 5,000,000, current liabilities 1,000,000. Capital employed = 4,000,000. ROCE = 500,000 / 4,000,000 × 100 = 12.5%.
Capital employed is based on book values, which may not reflect market values for asset-heavy businesses. ROCE can be inflated by write-downs that reduce total assets. Compare within the same industry, as capital intensity varies significantly.
Frequently asked questions
Generally, ROCE should exceed the company’s cost of capital (WACC). A ROCE consistently above 15–20% indicates strong capital efficiency. Compare against industry peers rather than using absolute thresholds.
ROE measures return on shareholders’ equity only. ROCE measures return on all long-term capital (equity + debt). ROCE is more useful for comparing companies with different capital structures because it removes the effect of leverage.
EBIT strips out interest and tax, which vary with capital structure and jurisdiction. This isolates operating performance from financing and tax decisions, making cross-company comparison fairer.
Yes, if EBIT is negative (operating loss). A negative ROCE indicates the business is destroying capital rather than generating returns on it.
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