Capital efficiency

Return on capital employed, or ROCE, measures how efficiently a company uses all the long-term capital it has — both the owners' equity and the money it has borrowed.

ROCE = (EBIT ÷ Capital employed) × 100

Capital employed = shareholders' equity + interest-bearing debt.

EBIT means earnings before interest and tax — the operating profit, before the effects of how the company is financed. Using EBIT makes ROCE a fairer comparison across companies with different amounts of debt than ROE is.

Example: Nova Industries has EBIT of ₹150 crore, shareholders' equity of ₹500 crore and debt of ₹500 crore. Capital employed is ₹1,000 crore, so ROCE = (150 ÷ 1,000) × 100 = 15%.

EBIT: ₹150 crore
Equity: ₹500 crore
Debt: ₹500 crore
Capital employed: ₹1,000 crore
ROCE: 15%

Return on Capital Employed (ROCE)

How efficiently all long-term capital — equity and debt — is being used.

ROCE = EBIT ÷ (Equity + Debt) × 100

EBIT (Operating Profit)(₹ Cr)

Shareholders' Equity(₹ Cr)

Total Debt(₹ Cr)

Return on Capital Employed

20%

Capital Employed

₹1,500 Cr

ROCE lets you compare businesses with different mixes of debt and equity, because it measures profit against all the capital used. A ROCE consistently above the cost of borrowing is one sign a business creates value as it grows.

Because ROCE uses EBIT (before interest), it looks at the profitability of the business itself rather than the way it happens to be funded.

Return on Capital Employed (ROCE)

Key takeaways

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