What is Return on Capital Employed

What is Capital Employed

Capital Employed is the value of assets used by the company to contribute the earning of the company, is simple method capital employed is calculated by subtracting Total assets from Liability.

The Capital Employed is generally not as much use for the fundamental analysis of the company, but the ratio analysis help to calculate the return on Capital Employed.

How to understand: 

Return on Capital Employed (ROCE) is a financial ratio which indicates the profit that the company makes from the capital company employed. ROCE is the calculation of return made by the company as a whole.

When You go deep Return of Equity (ROE) and Return of Capital Employed (ROCE) are same, the major difference is ROE calculation returns derives from Equity Capital and ROCE calculation derives from all the capital of the company.

If the Company finance completely from Equity then ROCE & ROE are same.

Return on Capital Employed Formula

Return of Capital Employed is very simple to calculate, It is easily calculated by watching company balance sheet and Profit and Loss account.

Return of Capital Employed = Net Operating profit after taxes/Average capital employed

For the calculation of ROCE, you must aware of Average Capital Employed-

Average Capital Employed

Capital Employed is considered for the whole capital of the company, all Long-term borrowing is considered except current liability while calculating Capital Employed.

Capital Employed = Share Capital + Surplus and Reserves + Long-term Loans – Investment Outside – Preliminary Expenses

Average Capital Employed = Current Capital Employed / 2

Net Operating Profit after Taxes

Net Operating Profit is the company potential to earn profit from Market capitalization, It is operating profit which is financed by the capital employed (other than Equity or investment outside business).

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