return on capital employed

• Return on Capital Employed (ROCE)


  One of the most important financial ratios used in business, measures the profitability of a business and how efficiently it uses its capital
• ROCE


  Profit the business returns as a percentage of every one pound of capital that is invested into the business
• If a business had a ROCE of 10, this means for every one pound of capital employed in the business 10p of profit is being generated
• ROCE is a very popular financial ratio, especially for investors
• Capital employed in a business


  Can come from long-term borrowing, shareholder investments, and retained profits
• Calculating ROCE


  Operating profit divided by Capital employed, multiplied by 100
• ROCE can also be calculated by dividing the net profit before interest and tax by the capital employed and multiplying the answer by 100
• The capital employed figure can be calculated by adding the total equity and non-current liabilities of the business
• Businesses


  • Tom's Tops
  • Jasmine's Jackets
• Tom's Tops ROCE


  46.15%
• Jasmine's Jackets ROCE


  38.46%
• Tom's Tops is using the capital invested in the business more efficiently than Jasmine's Jackets, despite Jasmine's Jackets being more profitable overall
• ROCE can be analyzed further by comparing it to the business's previous years, competitors, or industry averages
• Strategies to improve ROCE

  1. Increase revenue

  2. Decrease cost of sales

  3. Reduce non-current liabilities