Fundamental Glossary / Profitability Metrics
Return on Capital Employed (ROCE)
Operating profit relative to the capital used in the business, both equity and interest-bearing debt.
Formula
EBIT / capital employed. Capital employed is usually total assets minus current liabilities, or equity plus debt.
What it means
ROCE asks whether the business earns enough on the money tied up in it, before the split between lenders and owners. It is a favourite ratio in Indian equity research for that reason.
A ROCE above the cost of capital means the firm creates value when it reinvests. A ROCE below that cost means growth destroys value even if sales rise.
How to read it
Look at ROCE over a cycle, not one good year. Also watch incremental ROCE: the return on the new capital spent this year, not only the return on the old base.
What to watch
Large cash balances lower the capital employed if you exclude them, and they lower the return if you leave them in. Say which version you use. Goodwill from an acquisition inflates capital and depresses ROCE.
This note explains the term. It is not a research recommendation, a target price, or a comment on any security. Ratios and regulatory thresholds change; use the latest filing or circular for a live figure.