What is net on return capital employed?

Answer 1

Return on capital employed is a ratio used in finance, valuation, and accounting.

The formulaROCE compares earnings with capital invested in the company. It is similar to Return on Assets (ROA), but takes into account sources of financing. Operating IncomeIn the numerator we have pre-tax operating profit or operating income. However, it is also possible to adjust the EBIT by deducting the sum of the income and taxes. In the absence of non-operating income, operating income agrees with Earnings before interest and taxes (EBIT); otherwise, it can be derived from EBIT by subtracting non-operating income. Capital EmployedIn the denominator we have net assets or capital employed instead of total assets (which is the case of Return on Assets). Capital Employed has many definitions. In general it is the capital investment necessary for a business to function. It is commonly represented as total assets less current liabilities or fixed assets plus working capital.

ROCE uses the reported (period end) capital numbers; if one instead uses the average of the opening and closing capital for the period, one obtains Return on Average Capital Employed(ROACE).

ROCE is return on capital employed

ROCE is pronounced rocky not rosce

ApplicationROCE is used to prove the value the business gains from its assets and liabilities, a business which owns lots of land but has little profit will have a smaller ROCE to a business which owns little land but makes the same profit.

It basically can be used to show how much a business is gaining for its assets, or how much it is losing for its liabilities.

Drawbacks of ROCEThe main drawback of ROCE is that it measures return against the book value of assets in the business. As these are depreciated the ROCE will increase even though cash flow has remained the same. Thus, older businesses with depreciated assets will tend to have higher ROCE than newer, possibly better businesses. In addition, while cash flow is affected by inflation, the book value of assets is not. Consequently revenues increase with inflation while capital employed generally does not (as the book value of assets is not affected by inflation)