RoCE tells you how efficiently the company has used its capital during the year and how much return it has generated on the capital that it used.
Say, company’s capital investment is Rs 100 Its operating profit during the year is Rs 20 (contd.)
Then, RoCE will be = Operating Profit is Rs 20 /Average Capital Employed is Rs 100 = 20% *(Capital Employed = Total Debt + Shareholder’s Equity)
The better the company is.
- RoCE helps you assess how efficiently the management has used capital.
- It also helps you compare a company with its peers.
- RoCE can’t be used to analyse the BFSI (banking, finance & insurance) sector.
- Sometimes, the total available capital is not deployed into the business. So, a high cash balance can lower the ratio and make you feel like the company may be inefficient.