← Business Metric: Financial (all topics)
ROCE (return on capital employed)
What it is
Operating profit before interest and tax divided by capital employed - total assets less current liabilities. It measures the return the business earns on all the capital it uses, debt and equity together
It is the single most comparable profitability measure across capital-intensive industries, because it is unaffected by how the business is financed
Impact on industries
- Comparable across companies with different debt levels, unlike return on equity, so it isolates operating quality from financing choices
- A return persistently above the cost of capital is what creates value; below it, growth destroys value however fast revenue rises
- Capital employed is measured at book value, so an old asset base flatters the ratio and a recently expanded one depresses it
- What counts as good varies hugely by industry - a branded consumer business and a steel plant cannot be judged on the same threshold