what is roce

ROCE stands for Return on Capital Employed, which is a financial ratio used to assess a companys profitability and capital efficiency. It measures how efficiently a company is using its capital to generate profits. The formula for calculating ROCE is Earnings Before Interest and Tax (EBIT) divided by Capital Employed, expressed as a percentage. Capital Employed is the total amount of capital used by a company, including both equity and debt. ROCE is considered one of the best profitability ratios and is commonly used by investors to determine whether a company is suitable to invest in or not. A consistently high ROCE indicates that the company is generating attractive returns, which can instill confidence in investors and potentially attract more capital. However, ROCE has some drawbacks, such as measuring return against the book value of assets in the business, which can lead to higher ROCE for older businesses with depreciated assets.