ROCE - Return on Capital Employed - What is ROCE | Investing 101 | Edelweiss Wealth Management

This video by Edelweiss Wealth Management gives a short tutorial on how to calculate return on capital employed and explains its importance to determine the profit that a company earns for the capital it employs.

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What is ROCE?

ROCE or return on capital employed is a ratio that is used to evaluate the performance of a business. The main idea behind any business is to earn profit. Be it the education sector, automobile sector, finance sector, all businesses are established with core intention to earn profit. In order to earn profit every entrepreneur has to invest capital in the factory, production activities, building inventory and other such numerous variables.

Hence understanding ROCE or return on capital employed is very important because it is a key measure to assess relative returns against the total capital employed. ROCE typically depicts the aggregate profits earned by the investments done by the entrepreneur or company. This financial parameter is also a useful benchmark to calculate target rate of return and can also be used to assess competition in the market.

How to calculate ROCE?

ROCE Formula

ROCE = Operating Profit/(Total Assets - Current Liabilities)

Operating profits = Turnover - Operating Expenses

ROCE can be used to analyse the performance of different companies but is important to know that ROCE for different industries can be different. While choosing a company to invest in, look out for a company with higher ROCE and analyse it from a competitive perspective as well.

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[faizang]

well explained..do upload more financial points

[kirs]

what if the liabilities are larger than the assets? Then how do you do the calculation?