Return on Capital Employed

Return on Capital Employed (RoCE) measures the success of a company in generating profit on capital invested. RoCE is expressed as a percentage.

ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed * 100

Where,

Earnings Before Interest and Tax (EBIT) = Profit after Tax + Taxes + Interest

Capital Employed = Fixed Assets + Current Assets - Current Liabilities

or

Capital Employed = Equity + Non-current Liabilities

This ratio is very useful for the investors seeking an approximate return on the capital employed by them. It also takes all the factors into consideration like long term financing and helps to ascertain a better approximation of the profitability of the company over a longer period of time.

Let’s calculate the ROCE earned by two companies in the pain industry for FY18:

Of these two companies, Asian Paints’ ROCE of 35.25% is much higher than Berger’s. This means that for every rupee invested in Asian Paints, it earned 35 paise in a period of 12 months ended March 2018. Investors will prefer investing in Asian Paints vis-à-vis Berger Paints considering it’ll give better returns on their capital by making efficient use of it.