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Monday, October 27, 2014

Return On Capital Employed

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Return On Capital Employed

·         Return on capital employed is used to determine how much profit the company is able to generate on the capital employed by it. The capital employed is calculated by deducting current liabilities from its total assets.

How to interpret ROCE

This ratio indicates efficiency of a company in employing its capital and also used to compare profitability levels between various companies. Higher ROCE indicates that a company is more efficiently using its capital and vice-versa. ROCE has to be higher than company's cost of borrowing. This also helps companies decide if they should take on more debt for expansion projects.

Formula

ROCE = Earnings Before Interest Tax (Total Assets Current Liabilities) Company A Company B EBIT of Rs 200 crore EBIT of Rs 300 crore Capital Employed Rs 400 crore Capital Employed Rs 1200 crore ROCE 50% (200/400)% ROCE 25% (300/1200)% Company A is efficiently using its capital than company B. Return on Equity (ROE) or Return on Net Worth

Return on Equity reveals how much profit a company generates with money that equity share holders have invested. It will indicate to the investors how well their capital is being reinvested by the company.

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