What is ROCE?

 While analyzing a company, financial ratios are very important. In this blog, I will explain a very popular ratio, Return On Capital Employed (ROCE). I will be covering the following topics:

• What is ROCE?
• How is it calculated?
• Where to find ROCE?
• What is the ROCE of a good company?
• Some important things to keep in mind.

| What is return on capital employed?

Return on capital employed, or ROCE is a profitability ratio of a company. It tells that how much profit a company is making on its capital employed. Capital employed means the money a company is using on it's business.

| How is ROCE calculated?

The formula to calculate the ROCE of a company is : ROCE = Earnings Before Interest and Taxes (EBIT) / Capital Employed. The EBIT (also known as Operating Profit) is given in the income statement of the company whereas Capital employed is given in the Balance Sheet. Capital Employed can be calculated by two methods - 1st method is : Total Assets - Current Liabilities, and the 2nd method is : Fixed Assets + Working Capital. Generally, the first method is used to calculate the ROCE. Example - Let's consider AB Ltd. is a company whose income statement and balance sheet is given like this -

Here, EBIT = 12 Cr. Rupees

          Capital Employed = ?

Here, we will use the 1st method to calculate the ROCE. So Total assets - Current liabilities = 60 Cr. - 5 Cr. = 55Cr. Rupees. Hence ROCE will be 12 Cr. / 55Cr. = 21.82%.

| How to find ROCE?

 Bur usually, retail investors like you and me don't have to calculate the ROCE as it is a very important ratio. Because of that, companies show their ROCE in their annual report. We can also find it on websites like Screener, Moneycontrol, etc.

| What is the ROCE of a good company?

 Usually investors consider ROCE as an indicator of the strength of a company. Generally, ROCE above 15% is considered as a good sign. If the ROCE of a company is above 15% since the past 7 to 10 years, it is considered to be strong at it's business and can be a good investment for long term.

| Some important things to keep in mind.

One should not invest in a company by only checking 1 financial ratio. We should check all the ratios of a company while analyzing stocks. Along with that, we should also think about the future products and services of the company we are analyzing. And after analyzing, if the company is increasing its profit year by year, then only we should invest in the company. Along with analysis of the company, our discipline and patience as an investor is also important.

That's it, hope you liked this blog. Please comment down your feedback and some content ideas too.