What Is Return on Capital Employed?

By Kristi Waterworth – Updated Apr 16, 2025 at 11:50 PM EST

Key Points

ROCE includes both debt and equity, offering a comprehensive investment metric.
ROCE is calculated as EBIT divided by (Total Assets - Current Liabilities).
Comparing ROCE with industry peers helps assess company performance.

When you're considering buying stock in a new company, you have to ask yourself many hard questions. Do you believe the company is behaving ethically? Is it creating products or offering services that will stand the test of time?

Smiling person working on laptop in modern office. — Image source: Getty Images.

Loading image...

What is return on capital employed?

Simply put, the return on capital employed (ROCE) measures how much profit results from capital employed—that is, how much money the business needs to operate. The difference between ROCE and other similar metrics is that ROCE considers both debt and equity in the equation.

Although ROCE is just one of many metrics you should use to determine if an investment is right for you, it's very important because it considers long-term financing in the mix. If a company is leveraging a lot of debt, this can change the picture substantially, even if the company is healthy and profitable. ROCE evens the playing field a bit.

Loading paragraph...

Why use return on capital employed as a metric?

There are lots of different profitability ratios you can use when looking at stocks, but return on capital employed is a good choice because it takes more of the realities of doing business into account. Companies using debt as part of their business strategy don't immediately look suspicious when calculating ROCE, which can help you find more gems that you might have otherwise overlooked.

Just keep in mind that there's no ideal number for ROCE, since you'll need to compare the ROCE of your company to the rest of its industry or sector to figure out if it's doing well or poorly. This is similar to many other metrics, like the price-to-earnings ratio (P/E ratio), where you'll have to look at other companies to find out where your company sits.

How to calculate return on capital employed

Calculating the return on capital employed is pretty simple. You'll just need the earnings before interest and taxes (EBIT) for the company you're looking to evaluate, as well as its total assets and current liabilities. As a reminder, EBIT is the same as operating income.

You can calculate the capital employed by subtracting the current liabilities from the total assets, like this:

Capital Employed = Total Assets - Current Liabilities

And then calculate the return on capital employed by dividing the EBIT by this number:

ROCE = EBIT / Capital Employed

So, if your company's EBIT is $64 million, its total assets are $375 million, and its current liabilities are $100 million, the ROCE is:

ROCE = $64 million / ($375 million - $100 million)

ROCE = $64 million / $275 million

ROCE = 0.23

That means the return on the capital employed for this company is 23%, or 23 cents on every dollar.

Why return on capital employed matters to investors

Understanding how companies are using their money is really important when you're evaluating one as a potential investment. You don't want to ever buy stock in a company that you don't understand, and the return on capital employed is one way to better get to know your company.

Since this calculation also accounts for debt in the figure, it can give you a more realistic picture of how well your company is performing against similar companies in its industry, including the debt that it's leveraging.

Debt isn't always the enemy, but poorly leveraged debt is not something you want to see as an investor. Always make sure your company is doing something to make that debt worth having.

Loading paragraph...

About the Author

Kristi Waterworth has been a contributing real estate and financial expert at The Motley Fool, covering real estate, investing, and personal finance topics, since 2020. Kristi has been interviewed by various TV media outlets and podcasts for her real estate investing expertise – from residential real estate to digital real estate and everything in between. Kristi’s journalist career spans over 25 years, and she has written about real estate investing, homeownership, and home construction specifically for the last decade. She was also previously a licensed Realtor and general building contractor before the Great Recession and housing market collapse. She holds a bachelor’s degree in American history from Columbia College in Missouri.

TMFMaldivesBlue

@MaldivesBlues

The Motley Fool has a disclosure policy.