Business calculators

Return on Capital Employed Calculator (ROCE)

This calculator will help you determine your companys return on capital employed (ROCE), ROCE is a key metric for assessing a companys profitability and efficiency. To calculate ROCE, simply enter your EBIT, Asset and Liabilities.

Understanding Return on Capital Employed

What is return on capital employed?

The return on capital employed (ROCE) is a financial metric that measures the profit a company makes in relation to its capital employed. Capital employed refers to the total amount of capital used to make profits. It can also refer to the total value of assets a business uses to make earnings.

Importantly, when calculating the ROCE, you generally do not include total liabilities. Because this metric wants to account for long-term debt obligations, the calculation looks at interest-bearing debt. That means mortgages, business loans, and credit cards.

But to have a complete picture of ROCE, you must also consider long-term liabilities, such as multi-year lease payments.

What is the ROCE ratio formula?

In its simplest form, the return on capital employed formula looks like this:

ROCE = EBIT / Capital Employed

EBIT stands for earnings before interest and taxes, also known as operating income. Capital employed can be represented in two ways: total assets minus total current liabilities or equity plus non-current liabilities. Therefore, if we can break down the formula, it can come in two forms:

ROCE = EBIT / (Total assets – Total current liabilities)

ROCE = EBIT / (Equity + Non current liabilities)

Which formula you use will depend on the types of liabilities the company has. But for most businesses, both ROCE formulas are applicable. To better understand a company’s ROCE, you can substitute EBITDA — earnings before interest, taxes, depreciation, and amortization — for EBIT in both formulas.

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How do I calculate return on capital employed?

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.

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.
Find the total assets and total liabilities on the balance sheet.
Plug these figures into the first ROCE formula and calculate.
Find the equity and non-current liabilities on the balance sheet.
Plug these figures into the second ROCE formula and calculate.

Return on capital employed calculation example

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.

What is a good ROCE ratio?

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.

How do you improve the ROCE ratio?

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.

What is the difference between ROCE and ROIC?

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

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).

What is the difference between return on capital employed and return on equity?

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.

The information provided by the ROCE calculator provides general information. It is not a substitute for the advice of an accountant or other tax and accounting professional. The calculator may not account for every circumstance that applies to you or your business. Gusto (“Gusto”) does not warrant, promise or guarantee the information in the calculator is accurate or complete, and Gusto expressly disclaims all liability, loss, or risk incurred as a direct or indirect consequence of its use. By using the calculator, you waive any rights or claims you may have against Gusto in connection with its use.

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