Learn more about common financial (and startup) terms here. To learn more about Pilot, fill out the form below.
Return on Capital Employed (ROCE) is a financial metric that measures a company's profitability and efficiency in utilizing its capital. By comparing the earnings generated by a business to the capital invested, ROCE provides insights into how effectively a company uses its resources to generate returns. This metric is useful for comparing the performance of companies within the same industry, as it considers both debt and equity financing. In this article, we'll show how to calculate ROCE, discuss its importance, and suggest strategies for improvement.
Here's the ROCE formula:
Return on Capital Employed (ROCE) = Operating Profit / Capital Employed
Let's consider a real-world example of a retail company, such as a clothing store. We'll use the following data to calculate the ROCE:
Calculate the Capital Employed by subtracting Current Liabilities from Total Assets:
Capital Employed = Total Assets - Current Liabilities
Capital Employed = $2,000,000 - $800,000
Capital Employed = $1,200,000
Calculate the ROCE using the Operating Profit and Capital Employed:
Return on Capital Employed (ROCE) = Operating Profit / Capital Employed
ROCE = $500,000 / $1,200,000
ROCE = 0.4167 or 41.67%
In this example, the ROCE of the clothing store is 41.67%, which means that for every dollar of capital employed, the company generates 41.67 cents in operating profit.
Understanding the Return on Capital Employed (ROCE) is essential for several reasons:
Here are some strategies that can help improve your ROCE:
Pilot provides bookkeeping, CFO, and tax services for literally thousands of startups and growing businesses. We've successfully processed over 10 million transactions for our customers and have unparalleled expertise when it comes to helping businesses succeed.
We're the largest startup-focused accounting firm in the United States, and we'd love to help you. To talk to an expert on our team and find out what Pilot can do for you, please click "Talk to an Expert" below, or email us at info@pilot.com.
Get the peace of mind that comes from partnering with our experienced finance team.