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:
| Particulars | Asian Paints | Berger Paints |
| EBIT | Rs. 2,887 crore | Rs. 678 crore |
| Total Assets (A) | Rs. 11,588 crore | Rs. 3,505 crore |
| Current Liabilities (B) | Rs. 3,399 crore | Rs. 1,294 crore |
| Capital Employed (A) - (B) | Rs. 8,189 crore | Rs. 2,211 crore |
| ROCE | 35.25% | 30.66% |
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.