ROCE stands for return on capital employed: a ratio which measures how effectively a company uses capital.
ROCE is calculated by dividing a company’s earnings before interest and tax (
EBIT) by its capital employed. In a ROCE calculation, capital employed means the total assets of the company with all liabilities removed.
By using ROCE, traders and analysts can get a better idea of how efficiently a company is using its capital. Two companies with similar earnings and profit margins may have very different returns on their capital employed, meaning that while they look similar on the surface one is significantly better at spending its capital.
Analysts may use ROCE as a means of performance trend analysis for a company. In the majority of cases, an increasing ROCE ratio implies strengthening long-term profitability.