RoCE - A beginner’s guide

RoCE (Return on Capital Employed)

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.

Here’s an example

Say, company’s capital investment is Rs 100 Its operating profit during the year is Rs 20 (contd.)

RoCE calculation

Then, RoCE will be = Operating Profit is Rs 20 /Average Capital Employed is Rs 100 = 20% *(Capital Employed = Total Debt + Shareholder’s Equity)

The higher the RoCE…

The better the company is.

How is RoCE useful

- RoCE helps you assess how efficiently the management has used capital.

How is RoCE useful

- It also helps you compare a company with its peers.

Limitations of RoCE

- RoCE can’t be used to analyse the BFSI (banking, finance & insurance) sector.

Limitations of RoCE

- 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.