Return on capital employed (ROCE) meaning

Return on capital employed (ROCE) measures how efficiently a company generates operating profit from the capital it uses, and is frequently cited in UK and Irish M&A due diligence, valuation, banking covenants and performance warranties, and in assessing directors’ duties and shareholder returns. It is not defined by legislation or case law; it is a descriptive financial metric, so the precise calculation should be checked in the relevant contract, accounting policy or analyst methodology (IFRS or UK GAAP). Common calculation: operating profit (EBIT) × 100 ÷ capital employed. Capital employed is typically shareholders’ equity plus non‑current debt, or total assets minus current liabilities. Many practitioners adjust by adding short‑term borrowings and excluding intangibles to focus on tangible capital employed. Example: EBIT £897m on capital employed £4,342m gives ROCE of about 20.7%. ROCE captures returns on all assets employed, including those financed by borrowings. A low ROCE indicates inefficient use of capital even where profit margins are high. As a yardstick, ROCE should exceed the risk‑free rate (UK gilts) and, in practice, the company’s cost of debt or weighted average cost of capital; otherwise higher gearing or interest rates depress shareholder returns. What counts as ‘very good’ is sector‑ and cycle‑dependent; use contemporaneous...