Return on capital

Return on capital is one of the most useful ratios when it comes to measuring the performance of a company.

Return on capital is one of the most useful ratios when it comes to measuring the performance of a company. The basic sum is simple: you just express a firm's net profit as a percentage of the capital the company has used - both shareholders equity (the net assets of the company that belong to the shareholders - the balance of assets and liabilities) and debt (long term and short term).

For the firm to be adding value, the return on capital should be greater than the cost of capital and, all things being equal, a firm making high return on capital should be considered superior to one making a lower return.

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