Return on capital employed
Return on capital employed is an accounting ratio used in finance, valuation, and accounting. It is a useful measure for comparing the relative profitability of companies after taking into account the amount of capital used.
The formula
It is similar to return on assets, but takes into account sources of financing.Capital employed
In the denominator we have net assets or capital employed instead of total assets. Capital Employed has many definitions. In general it is the capital investment necessary for a business to function. It is commonly represented as total assets less current liabilities.ROCE uses the reported capital numbers; if one instead uses the average of the opening and closing capital for the period, one obtains return on average capital employed.
Application
ROCE is used to prove the value the business gains from its assets and liabilities. Companies create value whenever they are able to generate returns on capital above the weighted average cost of capital. A business which owns much land will have a smaller ROCE compared to a business which owns little land but makes the same profit.It basically can be used to show how much a business is gaining for its assets, or how much it is losing for its liabilities.