Return on Capital Employed (ROCE)

Posted in Finance, Accounting and Economics Terms, Total Reads: 1565
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Definition: Return on Capital Employed (ROCE)

Return on Capital employed is used to determine the efficiency and profitability of a company. It shows how much a company is able to generate income from the capital employed in the company. It is calculated as


Return on Capital Employed  =    Net Income

                                        Total assets – Current Liabilities


ROCE should be greater than the cost of borrowing for a company, otherwise the it will reduce the value of the company for the shareholders.

Example:

Company A has generated a net income of Rs. 100 crore. Its Total Assets as per the balance sheet is 1000 crore and its current liabilities is 200 crore.

Return on Capital Employed = 100/(1000-200)

                                        = 0.125

                                        = 12.5%

Hence, this concludes the definition of Return on Capital Employed (ROCE) along with its overview.

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