6.5What is ROCE (Return on Capital Employed)?
1What is it?
ROCE measures profit before interest and tax compared with all capital used: equity plus debt.
2Why does it exist?
Unlike ROE, it can’t be inflated by borrowing, so it shows the true efficiency of the business.
3Diagram
High value means…
Efficient business; high-quality companies often have ROCE above 15–20%.
Low value means…
Capital-hungry or inefficient business.
Is high or low good?
Higher is better. ROCE above the company’s borrowing cost is a must.
4Calculation
ROCE = EBIT ÷ (Equity + Debt) × 100 (EBIT = earnings before interest and tax)
- EBIT = ₹1,500 cr; equity = ₹5,000 cr; debt = ₹2,500 cr.
- ROCE = 1,500 ÷ 7,500 × 100 = 20%.
The business earns 20% on all capital used.
5Risks
- Not suitable for banks (borrowing is their raw material).
- Asset revaluations change capital employed.
6Practical use
Always compare a ratio with (1) the company’s own history and (2) other companies in the same industry. A single number on its own means little.
7Quick revision
- ROCE = EBIT ÷ (equity + debt).
- Includes debt, so harder to manipulate.
- Avoid for banks.
8Knowledge check
Q1. EBIT ₹200 cr, capital employed ₹1,000 cr. ROCE?Show answer
20%.
Q2. Why is ROCE better than ROE for indebted companies?Show answer
It includes debt in capital, so leverage cannot inflate it.
Q3. Should you use ROCE for HDFC Bank?Show answer
No, use ROE/ROA for banks.