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Return on capital employed |
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Return on capital employedA measure of a company's profitability. It may be defined as:Earnings before interest and tax divided by total capital employed plus short term borrowings minus total intangibles.ROCE takes all the assets employed in the business, including borrowings, and measures the return the company made on them. If a company has a low ROCE, it is using its resources inefficiently, even if its profit margin is high.Calculation: multiply operating profit by 100, and divide the result by total capital employedExample: Company A made an operating profit of £897m on total capital employed of £4,342m. ROCE was therefore (897 x 100) / 4,342= 20.66%Yardstick: A company's ROCE should be higher than the return on gilts (the benchmark for a risk-free investment return). And unless it is higher than the cost of borrowing, any increase in the company's borrowings or the general level of interest rates will reduce shareholders' earnings. A ROCE of 20% or more is considered very good.Similar MatchesSelf employed incomeSelf employed incomeTaxable income of a person involved in a sole proprietorship or other sort of free-lance work. Capital employedCapital employedThe value of all the assets employed in a business, including equity and preference capital, fixed and current assets, and gross borrowings.The most common use of capital employed is in the calculation of 'Return on Capital Employed' which measures the operating profit of a company as a percentage of capital employed. In effect, ROCE is telling you how efficient a company is in squeezing profit out of capital. A company that gets £20m of profit out of £200m capital employed is doing much better than one that gets £20m of profit out of £800m of capital employed. Self employedSelf employedA person who operates as a sole trader or as part of a partnership. |
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