Calculating Return on Capital
Employed (ROCE)
What does Return on Capital
Employed (ROCE) tell us?
The Return on Capital Employed figure measures how effectively
the capital invested in the business is being used to create profits.
As a guide the ROCE should be at least 5% above the cost of
borrowing, so if a firm borrows at 6%, then a target ROCE would
be 11%+.
But even at this level a downturn in performance could mean that
borrowing to fund an investment costs more than the return
produced from the investment.
How to calculate ROCE
To calculate ROCE we use figures from both the
Profit and Loss Account as well as the Balance Sheet
The formula for ROCE is
Net Profit before Taxation
Capital Employed
times
100
1
So if Capital Employed is £1,456,000 and
Profit before Taxation is £236,000.
236,000
£1,456,000
times
100
1
= 16.2%
= ROCE%
Turnover
2012
£m
121.3
2011
£m
111.0
Fixed Assets
Cost of Sales
(60.9)
(57.0)
Current Assets
2012
(m)
2011
(M)
247
231
Stock
147
141
Gross Profit
60.4
54.0
Debtors
70
59
Expenses
36.4
32.6
Cash and Bank
24
86
Total Current Assets
241
286
Current Liabilities
303
261
Net Current
Liabilities/Assets
(62)
25
Total Assets less Current
Liabilities
185
256
Long-term Liabilities
24
29
Shareholders’ Funds
161
227
Capital Employed
185
256
Net Profit
24.0
21.4
From the Profit and Loss Account and
Balance Sheet we can calculate ROCE.
2012
Note – Capital Employed is made up of
24.0
100Long Term
Shareholders
funds and
times
= 12.97%
185
1
Liabilities
Calculate the firms ROCE for both years
2007
49
145+16
times
100
1
= 30.4%
2008
49
147+28
times
100
1
= 28%
Analysing your figures
Comment on actual figures, compare to what might be acceptable,
and note any trends or patterns.
The Return on Capital Employed figures for the firm over both years are very good.
Many companies would be happy with a ROCE of 15%, managers seeing 30.4% and
28%, would be very satisfied that the capital invested in the firm is producing
a very good return. The only slight worry is that the figure has fallen by 2.4% over
the two years, a trend that needs to be monitored carefully.