Lesson 02 — Return on Capital Employed (ROCE)
Week 07 · Lesson 2 of 3 · Week 07 — Key Ratios Part 1: Profitability
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ROCE = EBIT / Capital Employed × 100 Capital Employed = Total Assets − Current Liabilities (or = Equity + Longterm Debt) ROCE measures returns on total capit...
What is ROCE?
ROCE = EBIT / Capital Employed × 100
Capital Employed = Total Assets − Current Liabilities
(or = Equity + Long-term Debt)
ROCE measures returns on total capital, not just equity. It includes debt capital too.
ROCE vs ROE — when to use which
| Ratio | Best for |
|---|---|
| ROE | Companies with low debt (IT, FMCG) |
| ROCE | Companies with significant debt (infra, manufacturing, power) |
Why ROCE matters
Two companies may have the same ROE = 20%. But if Company A has no debt and Company B is heavily leveraged, Company A's ROCE will be much higher. ROCE gives you the TRUE capital efficiency.
Benchmarks
| ROCE | Signal |
|---|---|
| > 20% | Excellent |
| 15–20% | Good |
| 10–15% | Average |
| < 10% | Poor capital allocation |
What to look for
- ROCE > 15% for 5+ years = well-managed capital
- ROCE declining over time = management investing in low-return projects
- ROCE should exceed the company's cost of capital (~10-12%)
Key takeaway
ROCE tells you whether management is allocating capital wisely. Great management = consistently high ROCE.