Return on capital employed (ROCE)

This key ratio measures the profitability of a firm taking account of the amount of money it deploys.

Updated August 2018

Return on capital employed (ROCE) looks at a company's trading profit as a percentage of the money or assets invested in its business. In its simplest form, the money invested in a business is the amount of equity raised plus any loans taken out.

You can compare this to buying a house if you were to buy a £100,000 house with a 20% deposit, then the £100,000 of capital employed to buy the house is made up of an £80,000 mortgage and £20,000 of equity. In other words, this is all of the money (capital) the company is using (employing) to generate profits (the return in the case of a company, measured using operating profit).

Advertisement - Article continues below

You can look at the ROCE figure as being similar to an interest rate on a savings account the higher the better (within reason). ROCE can tell you how good the management team is at investing the money it has been given by investors and lenders in other words, it shows you how hard the capital tied up in the company is working, and can give you a good idea of whether the return being generated on that capital represents a good deal for potential investors.

As with many other financial ratios, it is best to calculate ROCE over a period of time. Ideally, you should go back for at least five years and look at the trend, since cyclical businesses (ones whose fortunes rise and fall with the level of broader economic activity) can enjoy a very high ROCE over short periods, while having low average returns over the longer term. A high and stable ROCE can be a sign of a very good company, as it shows that a firm is making consistently good use of its resources.

A good ROCE varies between industries and sectors, and has changed over time, but the long-term average for the wider market is around 10%.

See Tim Bennett's video tutorial:Six things every investor should know about ROCE.





A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020

Quantitative investing

Quantitative investing uses sophisticated computer-based mathematical models to identify and carry out trades.
8 May 2020

Quantitative easing (QE)

Quantitative easing (QE) involves electronically expanding a central bank's balance sheet.
8 May 2020

Emerging markets

An emerging market is an economy that is becoming wealthier and more advanced, but is not yet classed as "developed".
24 Jan 2020

Most Popular


As full lockdown ends, what are the risks for investors?

In the UK and elsewhere, people are gradually being let off the leash as the lockdown begins to end. John Stepek looks at what risks remain for invest…
29 May 2020
Global Economy

The MoneyWeek Podcast: James Ferguson on the virus, the lockdown, and what comes next

Merryn talks to MoneyWeek regular James Ferguson of Macrostrategy Partnership about what's happened so far with the virus; whether the lockdown was th…
28 May 2020

Can the UK housing market escape a slump?

The Bank of England is predicting a 16% slump in house prices.
29 May 2020