Understanding Return on Capital Employed (ROCE)

Published by StockScore Editorial • Reading time: 4 mins

Return on Capital Employed (ROCE) is a critical efficiency ratio. It measures how effectively a company uses all its available capital (both shareholders' equity and interest-bearing debt) to generate operating profit.

Why ROCE matters

Unlike ROE, which only considers shareholders' equity, ROCE looks at the entire pool of capital. This makes ROCE extremely useful when comparing capital-heavy companies (like manufacturing, utility, or steel companies) that rely on large bank loans to operate.

            ROCE = Operating Profit (EBIT) / Capital Employed (Total Assets - Current Liabilities)
          

What is a good ROCE?

As a rule of thumb, an ROCE **above 15%** is considered healthy. It indicates that the company is generating returns higher than the cost of borrowing capital. Exceptional companies (like top software consultants or premium FMCG groups) often report ROCE values exceeding 30% or even 50%, showing incredibly capital-efficient business models.