ROCE is the acronym in English for Return On Capital Employed, which in Spanish means profitability of the capital employed. ROCE is a ratio used to know the profitability of a company, since it allows to know the capacity of the company to generate income based on the capital that has been used.
This ratio is used in the finance sector, especially when you want to know if a It is capable of generating profits and to what extent, but also to compare the profitability of different companies based on the capital they use, especially in the investment sector.
Calculate the ROCE
To calculate the profitability of the capital employed by a company, the following mathematical formula is applied:
ROCE = EBIT
Elements of the ROCE formula:
These are the elements that make up the formula to calculate the return on capital employed or ROCE:
- EBIT they are the company's profits before taxes. It is calculated by subtracting operating and depreciation costs from the net sales amount.
- Employed Capital varies depending on the type of company and activity to which it is engaged, the following being the most common values:
- Capital employed = Total assets employed by the company
- Capital employed = Current assets minus current liabilities
- Capital employed = Total assets less current liabilities
In any case, an average of the capital employed between the beginning of the fiscal year and the end of it.
Interpretation of the ROCE ratio
Once the formula is applied, the profitability of the capital employed will be obtained.
A high return on invested capital will indicate an efficient use of the company's resources, so the ROCE must also be higher than the cost of capital for the company. On the contrary, a low return on invested capital reveals an inefficient use of the company's resources.