Term · Profitability & Growth
ROCE
In briefROCE shows the operating return on the capital tied up in the business, usually as EBIT relative to capital employed. For small caps it shows whether growth ties up a lot of additional capital.
Definition
ROCE measures the operating return on the capital employed in the business. It is common to use EBIT relative to interest-bearing debt plus equity less non-operating cash.
How it is calculated
Formula. Typically: ROCE = EBIT / Capital Employed. Define capital employed consistently.
Why it matters for small caps
The metric combines operating earning power and capital intensity. For small caps it shows whether growth ties up a lot of additional capital.
Common misreadings
- ROCE and ROIC are not interchangeable. Average or period-end capital, leasing and goodwill can substantially change the comparison.
In the process
Frequently asked
What is ROCE?
It is the return on capital employed before interest and taxes. It combines operating earning power with the capital intensity of a business.
How do you calculate ROCE?
Typically you divide EBIT by capital employed. It is important to define the capital employed consistently over time.
How does ROCE differ from ROIC?
The two are not interchangeable, even though they seem similar. Whether average or period-end values are used, and how leasing and goodwill are treated, can shift the comparison considerably.
Related terms
Sources
Primary
NYU Stern – Aswath Damodaran, Valuation Resources
https://pages.stern.nyu.edu/\~adamodar/
https://pages.stern.nyu.edu/\~adamodar/
Methodology
ESMA – Guidelines on Alternative Performance Measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.