 |
Return on Capital Employed - Finance Glossary Return on Capital Employed (ROCE) is a measuring tool that measures the efficiency and profitability of capital investments undertaken by a corporation. A firm acquires capital assets such as trucks, computers, etc to help makes its business operations more efficient, cut down on costs and realize greater profits or acquire more market share. Return on Capital Employed ratio also indicates whether the company is earning sufficient revenues and profits in order to make the best use of its capital assets. It is expressed in the form of a percentage, and the higher the percentage, the better. The formula for Return on Capital Employed (ROCE) is:
or
How Can Firms Increase the Return on Capital Employed Ratio? Firms can increase their Return on Capital Employed Ratio by:
Limitations of Using Return on Capital Employed Ratio Be careful when using the Return on Capital Employed ratio because it does not always yield the correct percentage. For instance, take a company that cuts down on its capital investments so as to increase the Return on Capital Employed ratio. This means the denominator "Total Assets - Current Liabilities" will be higher, because "Total Assets" will be lower (because of lesser capital assets). In this case, there has been no improvement in operations of the company, infact the firm is cutting down on potentially profitable capital investments! This is one of the major limitations of using the Return on Capital Employed ratio.
|
