ROCE Return on Capital Employed
Return on Capital Employed (ROCE) is a profitability ratio that measures how efficiently a company uses its capital (both debt and equity) to generate operating profit. It is particularly useful for evaluating capital-intensive businesses.
What Is ROCE?
ROCE = (EBIT / Capital Employed) x 100
Capital Employed = Total Assets – Current Liabilities
Or equivalently:
Capital Employed = Shareholders’ Equity + Long-term Debt + Deferred Tax Liabilities
ROCE measures how much operating profit is generated per rupee of long-term capital invested in the business.
Why ROCE Matters
– Shows total capital productivity (both debt and equity)
– Higher than the cost of capital means value is being created; lower means value is being destroyed
– Good for comparing companies in capital-intensive sectors (cement, steel, power, telecom)
– A consistently high ROCE indicates a business with strong competitive advantages and efficient capital use
ROCE vs ROE vs ROA
| Metric | Numerator | Denominator | Best For |
|——–|———–|————-|———|
| ROCE | EBIT | Capital Employed | Capital-intensive businesses |
| ROE | Net Profit | Equity | Shareholder return comparison |
| ROA | Net Profit | Total Assets | Asset efficiency |
ROCE and Cost of Capital
ROCE should exceed WACC (Weighted Average Cost of Capital). If ROCE is 15% but WACC is 12%, the company is generating 3% excess return on every rupee of capital employed, creating value.
Practical Example
A cement company has EBIT of Rs 500 crore and capital employed (total assets minus current liabilities) of Rs 2,500 crore. ROCE = 500 / 2,500 = 20%. If its WACC is 12%, the company is generating 8% excess return, indicating it is efficiently deploying capital and creating shareholder value.
Key Takeaways
– ROCE = EBIT / Capital Employed; measures return on total long-term capital (debt + equity)
– More comprehensive than ROE for capital-intensive businesses with significant debt
– ROCE exceeding WACC indicates economic value creation
– Useful for comparing companies in the same industry; cement, steel, and power companies are commonly evaluated on ROCE
– Consistent high ROCE (above 20%) over long periods is a hallmark of well-run businesses with competitive moats
