Return on Capital Employed - ROCE (8/5/00)

The best set of definitions that I encountered for calculating profitability ratios was at  <http://bized.ac.uk/stafsup/options/ratio/raprofe3.htm>.   This, in turn, let  me drill down to the definition of Return on Capital Employed at <http://bized.ac.uk/stafsup/options/ratio/raprofe3.htm>
  
Return on Capital Employed (ROCE) - sometimes called Return on Net Assets (RONA), is probably the
 most popular ratio for measuring general management performance in relation to the capital invested in the business. ROCE defines capital invested in the business as total assets less current liabilities, unlike ROTA
 <http://bized.ac.uk/stafsup/options/ratio/raprofe2.htm>, which measures profitability in relation to total assets.
 
 
ROCE =   Net Profit before Interest and Taxes (NPIT)      x 100 =     X%
                  Total Capital Employed (CE)                             
 
Capital Employed may be defined in a variety of ways, the most common being Fixed Assets plus Working Capital, i.e. Current Assets less Current Liabilities. This definition reflects the investment required to enable a business to function.
 
In order for a business to maximise profitability, management should consider the two elements of ROCE. First, the business needs to sell goods and services at a price that exceeds the cost, which is measured by the net profit margin <http://bized.ac.uk/stafsup/options/ratio/raprofe4.htm>. Secondly, the business must use the capital employed in the business to
 generate sufficient sales volume and revenue to maximise profitability, which is measured by the net asset turnover
 <http://bized.ac.uk/stafsup/options/ratio/raprofe5.htm>. The relationship between the two elements of ROCE can therefore be expressed as follows:
 
 ROCE =   Net Profit before Interest & Taxes       x          Sales Revenue
                              Sales Revenue                                      Capital Employed
 
            =        NET PROFIT MARGIN                 X           NET ASSET TURNOVER
 
  
A shorter explanation is given below:
 
CAPITAL EMPLOYED -   The total of fixed capital, deferred tax, tax equalisation account and all interest-bearing liabilities.   <http://www.fintech.co.za/financial/definitions.htm>
 
The numerator is generally profit before interest and income tax. See
 <http://www.churcher.com/FOSM/foundations-of-senior-management-9108.htm>
 

Bob (Robert E.) Jensen
Jesse H. Jones Distinguished Professor of Business
Trinity University, San Antonio, TX 78212
Voice: (210) 999-7347  Fax:  (210) 999-8134
Email:  rjensen@trinity.edu
http://www.trinity.edu/rjensen