ROCE

'Stock Investment made Easy'

Fundamental Analysis of a Company

ROCE 

Return on Capital Employed

ROCE is a profitability ratio it is also known as 'Return on Investment' ratio it indicates the percentage of Return on the total capital employed in the business

ROCE= EBIT/Capital Employed×100

The term capital employed = share capital+reserve and surplus+long term loans- ( non business assets + ficticious assets)

EBIT = Earning before Interest and tax.

Eg. EBIT= 40000

Capital Employed= 500000

ROCE= 40000/500000×100

= 8%

(Capital Employed= share capital +Reserve+long-term loan - non trading assets )

= 500000

Significance of ROCE 

1. The business can survive only when the return on capital employed is more than the cost of capital in the business.

Suppose once have been borrowed at 9% and ROC is 8% it shows that the form had not been employing the funds efficiently.

2. ROCE measures the overall efficiency of the firm. we can easily compare one form to another firm by using ROCE.

3. we can compare ROCE to Cost of capital to find out feasibility of borrowing funds from outside.