How to Calculate Return on Capital Employed

Save

Return on capital employed (ROCE) is a ratio that is used to measure how much a company gets for the cost of its capital. This shows whether the company is obtaining a decent profit for the amount of capital it owns. The higher the ratio, the better the company is. To calculate the return on capital employed, you need to know the total assets, current liabilities, revenue and operating expenses.

Subtract the operating expenses from the revenue to get the company's earnings before interest or tax (EBIT). As an example, take a company that has $10,000 in assets, $2,000 in liabilities, $5,000 in revenue and $3,000 in operating expenses. Subtracting operating expenses from revenue is $5,000 - $3,000 = $2,000. The EBIT for the example is $2,000.

Subtract the value of liabilities from the value of all assets to get capital employed. Continuing the example: Assets – Liabilities = $10,000 - $2,000 = $8,000.

Divide the EBIT by the result from Step 2 to get the ROCE. Finishing the example: $2,000 / $8,000 = 0.25.

Tips & Warnings

  • Reducing capital investments can increase a company's ROCE value but may not indicate an actual increase in profitability.

Related Searches

References

Promoted By Zergnet

Comments

You May Also Like

Related Searches

Check It Out

Are You Really Getting A Deal From Discount Stores?

M
Is DIY in your DNA? Become part of our maker community.
Submit Your Work!