Return on capital employed (ROCE) tries to measure the profitability and efficiency of investments.

 

The formula:

 

ROCE = EBIT / (Total Assets - Current Liabilities)

 

This measure thus tries to reveal the profitability of assets currently at hand. It says something about how effectively and efficiently a company uses its assets to generate revenue and income.

ROCE should always be higher than the rate of borrowing in e.g. banks. Otherwise, any new borrowing of the company would reduce shareholders' profit.

 

Investors might be compelled to invest in companies that show a high ROCE, because this might signal that the company is able to generate great profits from the assets currently at the disposal of the company.