Return on Capital Employed Ratio (ROCE Ratio)

The prime objective of making investments in any business is to obtain satisfactory

return on capital invested. Hence, the return on capital employed is used as a measure
of success of a business in realizing  this objective.
Return on capital employed (ROCE) establishes the relationship between the profit
and the capital employed. It indicates the percentage of return on capital employed in
the business and it can be used to show the overall profitability and efficiency of the
business.

DEFINITION OF CAPITAL EMPLOYED:

Capital employed and operating profits are the main items. Capital employed may be
defined in a number of ways. However, two widely accepted definitions are “gross
capital employed” and “net capital employed“. Gross capital employed usually means
the total assets, fixed as well as current, used in business, while net capital employed
refers to total assets minus liabilities. On the other hand, it refers to total of capital,
capital reserves, revenue reserves (including profit and loss account balance),
debentures and long term loans.

CALCULATION OF CAPITAL EMPLOYED:

Gross capital employed = Fixed assets + Investments + Current assets
Net capital employed = Fixed assets + Investments + Working capital*.
*Working capital = current assets − current liabilities.