Profitability Ratios #1: Return On Capital Employed

Some basic ratios to give an indication of profitability for companies you may be interested in for investment purposes.  Today we will begin with:

Return On Capital Employed

ROCE is the measure of the company's profitability from the capital used.  Or, income generated as a percentage of it's total capital.

The Formula

EBIT = Earnings Before Interest and Tax (or Operating Profit)

Capital Employed = Total Assets - Current Liabilities

or

Capital Employed = Shareholder Equity + Current Liabilities

Example

Using the balance sheet below, we will use both methods of 'capital employed' and EBIT to work out the Return On Capital Employed:

Source: Corporate Finance and Investment: Decisions and Strategies (5th Edition) p49, Richard Pike & Bill Neale

Source: Corporate Finance and Investment: Decisions and Strategies (5th Edition) p49, Richard Pike & Bill Neale

Example 1

Example 2