About

Return on Capital Employed (ROCE) is a long-term profitability ratio that measures how effectively a company uses all its available capital. While ROE focuses only on equity, ROCE considers both debt and equity (Capital Employed), making it a superior metric for comparing companies in capital-intensive sectors like telecommunications, energy, and heavy industry.

Investors use ROCE to see if a company is generating enough profit to justify the cost of the capital it has raised. A ROCE higher than the company's Weighted Average Cost of Capital (WACC) indicates that the company is creating value; a lower ROCE indicates value destruction.

Formulas

ROCE compares Earnings Before Interest and Tax (EBIT) to Capital Employed. Capital Employed is usually defined as Total Assets minus Current Liabilities.

ROCE = EBITTotal Assets − Current Liabilities × 100%

Reference Data

Industry Sector	Target ROCE (Benchmark)	Risk Level
Telecommunications	10% - 15%	Medium
Utilities / Energy	8% - 12%	Low (Regulated)
Pharmaceuticals	15% - 25%	High
Consumer Goods	18% - 30%	Medium
Retail	12% - 18%	High
Automotive	9% - 14%	High
Real Estate (REITs)	6% - 10%	Medium
Software / SaaS	20% - 40%+	High

Frequently Asked Questions

ROCE measures the return generated by the business operations themselves, regardless of how they are financed or taxed. Using EBIT (Earnings Before Interest and Taxes) removes the effects of tax regimes and interest payments, allowing for a purer comparison of operational efficiency.

Capital Employed represents the total value of all long-term funds invested in the business. It can be calculated as Total Assets minus Current Liabilities, or alternatively as Shareholder's Equity plus Long-term Debt.

ROE only considers shareholder equity. A company can artificially inflate its ROE by taking on massive debt (high leverage). ROCE accounts for this debt, preventing the illusion of efficiency created by leverage. It is a 'truth-teller' ratio.

Generally, yes. However, an extremely high ROCE might indicate that a company is not reinvesting enough cash back into the business for growth (under-investing), which could hurt long-term sustainability.