Return on Capital Employed

Return on capital employed (ROCE) is a financial ratio that measures the profitability of a company in terms of all of its capital. It is calculated by dividing net operating profit by capital employed. ROCE is a useful measure for comparing the relative profitability of companies after taking into account the amount of capital used.

Summary

• ROCE is a financial ratio that measures the profitability of a company in terms of all of its capital.
• ROCE is calculated by dividing net operating profit by capital employed.
• The significance of ROCE is that it gives a clear index of the utilization of assets earning capacity. It measures the overall profitability from the total funds employed.
• The limitations of ROCE are that it is based on earnings and capital employed of the business, which are subject to various manipulations by management or based on various different accounting policies.

Questions

• What is ROCE?
• How is ROCE calculated?
• What is the significance of ROCE?
• What are the limitations of ROCE?

Answers

• ROCE is a financial ratio that measures the profitability of a company in terms of all of its capital.
• ROCE is calculated by dividing net operating profit by capital employed.
• The significance of ROCE is that it gives a clear index of the utilization of assets earning capacity. It measures the overall profitability from the total funds employed.
• The limitations of ROCE are that it is based on earnings and capital employed of the business, which are subject to various manipulations by management or based on various different accounting policies.