Understanding ROCE
ROCE (Return on Capital Employed) measures how efficiently a company generates profits from its capital. It's calculated as:
ROCE = (EBIT / Capital Employed) × 100
Capital Employed = Total Assets - Current Liabilities
Capital Employed = Total Assets - Current Liabilities
ROCE Benchmarks
| ROCE Range | Interpretation |
|---|---|
| Above 20% | Excellent - Strong competitive advantage |
| 15-20% | Good - Efficient capital usage |
| 10-15% | Average - Room for improvement |
| Below 10% | Poor - Inefficient capital usage |
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Investment Insight
ROCE should be higher than the company's cost of capital (WACC). If ROCE < WACC, the company is destroying shareholder value.
How to Improve ROCE
- Increase operating profit margins
- Improve asset turnover (generate more revenue per rupee of assets)
- Reduce unnecessary capital investments
- Optimize working capital management