Return on Capital Employed Analysis and Interpretation

Return on Capital Employed or ROCE simply is a concept for return calculation. It is very important in the aspect of profit and loss. We are going discuss the concept and formula for ROCE in detail. For readers ease, we will be covering following.

  • Formula and Calculation of Return on Capital Employed
  • Calculation of NOPAT
  • Capital Employed Details
  • Interpretation

Here we go:

Formula and Calculation of Return on Capital Employed


ROCE is basically the profit generated over the total income of an individual, group or company. This is calculated over a specific period of time. The duration could be as low as a week and as high as an year or more. Earlier it was highly used around the investment banking circle as measure of profitability. But in recent past, has been ignored to an extent.

The formula of Return on Capital Employed is: Net Operating Profit after Taxes over Total long-term capital employed.

Return on Capital Employed = NOPAT / Total Capital Used

The NOPAT is usually for a specific timeframe. Hence often we also use Average Capital employed instead of total capital employed if NOPAT is for a wider duration.

Return on Total Capital Employed = NOPAT / Average Capital Employed

For above, the Average Capital Employed = (Closing Capital Employed + Opening Capital Employed) /2

How to Caculate NOPAT?

Net Operating Profit after Taxes or NOPAT is calculated based on TAX rate and EBIT. Lets assume that taxes for companies with revenue over INR 250 Crore is 30% and that for remaining is 20%.

Then NOPAT would be calculated as :
NOPAT = (Profits before Taxes + Interest Payments + One Time Payments) (1-Corporate Tax Rate)

One Time Paymenst are expenses or income which company gain or pay non-periodically.

Capital Employed detail

Capital employed calculation is very simple. It is usually the difference between total assets and current total liabilites.

Interpretation

ROCE is a good insight provider. It can calculate into the working business model of any company. Furthermore, an investor could gain better insights. If he/she were to compare the evolution of the ROCE value for the last 5 to 6 years of company to form an opinion.

Ankit Maheshwari

Ankit is an avid writer with experience of working Investment Banking domain for over 7 years. He has been tracking Indian markets for over 10 years now for educational and learning purpose.

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