What is Return on Capital Employed (RoCE)?

RoCE is a financial metric that measures a company’s efficiency in generating profits from its total capital.

It gives investors an idea of how well a company is utilizing its capital to generate returns.

How is RoCE Calculated?

RoCE = (Earnings Before Interest and Taxes (EBIT)) ÷ (Total Capital Employed)

EBIT: Profit before interest and taxes.

Capital Employed: Total assets minus current liabilities or equity plus debt.

Example: If a company has an EBIT of $500,000 and total capital employed of $2,000,000

RoCE = 500,000÷2,000,000= 25%

Please note: You can change Dollar to Rupee or Yen or Yuan or Euro or AUD – the concept remains the same

Why Is Considering RoCE Important Before Investing?

It indicates how efficiently a company is using its capital, which is crucial for long-term investments.

A high RoCE suggests a company is generating strong returns, making it more attractive for investors.


Difference Between RoE and RoCE:

RoE (Return on Equity): Focuses on returns generated from shareholders’ equity.

RoCE: Considers both equity and debt, making it broader.


When to Use RoE or RoCE:

RoE is useful for companies with low debt.

RoCE is better for companies with significant debt, as it considers the overall capital structure.

Accordingly, use ROCE and ROE to accordingly evaluate the instrument you intend to invest in.

Hope you find this helpful

All the best for your investment journey

God Bless!