Return on Capital Employed (ROCE)
EBIT divided by capital employed (total assets − current liabilities, equivalent to equity + non-current liabilities). Pre-tax operating return on the long-term capital base.
When to use: Use as a pre-tax counterpart to ROIC, popular in UK and European reporting. Compares operating returns across firms with different tax situations — useful when tax rates vary widely (cross-border comparisons, tax-rate transitions).
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| ROCE | Return on Capital Employed | EBIT divided by capital employed | % |
| EBIT | EBIT | Earnings before interest and taxes (operating income) | $ |
| CapEmployed | Capital Employed | Total assets minus current liabilities (or equity + non-current liabilities) | $ |
Real-Life Examples
Example 1: European Industrial
EBIT $400M. Capital employed (total assets $3,000M − current liabilities $500M) = $2,500M.
Given
Step-by-Step
16% ROCE — strong. ROCE is higher than ROIC for the same business because (a) it uses pre-tax EBIT and (b) capital employed includes non-current liabilities other than interest-bearing debt (e.g. pension obligations, deferred taxes).
Frequently Asked Questions
ROCE uses pre-tax EBIT; ROIC uses after-tax NOPAT. ROCE's denominator is broader (all non-current liabilities) while ROIC's is narrower (only interest-bearing debt + equity − cash). Same conceptual idea — return on capital — viewed pre-tax vs after-tax.
When comparing firms with materially different tax rates (international comparisons, tax-rate regime changes), pre-tax ROCE strips out that variation. Many UK and European managements feature ROCE as the headline capital-efficiency metric.
Industry-dependent. Industrials: 12-18% is good. Consumer brands: 20-40%. Asset-heavy utilities: 6-10%. Compare to weighted-average cost of capital (pre-tax WACC for ROCE) for value-creation assessment.