Return on Capital Employed Calculator (ROCE)

You can calculate ROCE with our calculator, Excel, or by hand. There are a few steps in the process, but they mainly involve finding figures using the company’s financial statements. You’ll need the balance sheet and income statement.

1. Find the EBIT of the business located on the income statement under “operating income.” You can also calculate the EBIT by adding net income, tax provisions, and interest expenses. 
2. Find the total assets and total liabilities on the balance sheet.
3. Plug these figures into the first ROCE formula and calculate.
4. Find the equity and non-current liabilities on the balance sheet. 
5. Plug these figures into the second ROCE formula and calculate.

Bloom Beauty, an all-natural cosmetics company, has an EBIT of $145.6M. Its total assets is listed as $839.3M, and total current liabilities are listed as $311.1M on the balance sheet. Let’s plug these figures into the first ROCE formula: 

0.28 = $145,600,000 / ($839,300,000 – $311,100,000)

Now all we need to do is multiply the decimal by 100 to turn this into a percentage, giving us a ROCE of 28 percent.

28% = 0.28 x 100

But let’s look at Bloom Beauty’s ROCE in terms of its equity and non-current liabilities. The balance sheet shows $299.7M in equity and $207.9M in non-current liabilities for the beauty brand. The EBIT is still $145.6M.

Let’s plug these into the second ROCE formula: 

0.29 = $145,600,000 / ($299,700,000 + $207,900,000)

Again, we turn the decimal into a percentage by multiplying by 100. That gives us a ROCE of 29 percent. 

29% = 0.29 x 100

In either case, the ROCE of Bloom Beauty is looking healthy.

With return on capital employed, the higher the ratio, the better. Generally, a ratio of 20 percent or more is considered healthy. That indicates the company is in an excellent financial position to grow. But, be sure to look at the ROCE ratio of competitors within a company’s industry. That’s where you’ll find the most accurate benchmarks for what makes a healthy or unhealthy ROCE ratio.

A low ROCE ratio indicates that a company uses its capital resources inefficiently and needs improvement. ROCE should at least exceed its cost of capital (the minimum necessary return to cover the costs of making a capital investment). If it doesn’t, the business is likely in an inferior financial condition. 

The strategies for getting a higher ROCE are the same for improving cash flow. Increase the amount of money flowing into your business (sales) and reduce the amount of money flowing out of your business (costs). 

Here are four ways to improve your ROCE:

• Reduce expenses by looking for all operational inefficiencies.
• Increase sales by working with your sales and marketing teams.
• Review your company budget for areas of inefficiency.
• Pay off debts or otherwise reduce liabilities.

Improving ROCE takes both long and short-term strategic thinking and planning. The best leaders work with their teams to ensure they develop the best plan. 

As we’ve noted, ROCE looks at a company’s profitability in relation to its capital employed. ROIC, or return on invested capital, looks at profitability related to invested capital. They’re closely related figures, and they’re both profitability ratios. But the formulas use different parts of the financial performance numbers.

The ROIC formula looks like this:

ROIC = Net Operating Profit After Tax / Invested Capital

The net operating profit after tax (NOPAT) is the company’s EBIT multiplied by one minus the tax rate. Here’s the formula:

NOPAT = EBIT x (1 – tax rate)

Invested capital can be calculated in two ways.

ROIC = Net Working Capital + Property Plant and Equipment (PP&E) + Goodwill and Intangibles

or

Total Debt and Leases + Total Equity and Equity Equivalents + Non-Operating Cash and Investments

A company’s ROCE and ROIC should both generally be higher than its weighted average cost of capital (WACC).

Again, we’re looking at two profitability metrics. Return on equity, or ROE, measures the profitability of a business in relation to the total value of shareholders’ equity. The formula looks like this:

ROE = net income / average shareholder’s equity

ROCE, on the other hand, looks at the profitability of a business in relation to all its capital.