Return on Average Capital Employed - ROACE

Return on Average Capital Employed - ROACE

A financial ratio that shows profitability compared to investments made in new capital. "Return on average capital employed" is calculated as:

EBIT
Average Total Assets - Average Current Liabilities

Total Assets - Current Liabilities = Capital Employed

It differs from the "return on capital employed" (ROCE) calculation, in that it takes the average of the opening and closing capital for a period of time, as opposed to only the capital figure at the end of the period.

Return on average capital employed is a useful ratio when analyzing businesses in capital-intensive industries, such as oil. Businesses that are able to squeeze higher profits from a smaller amount of capital assets will have a higher ROACE than businesses that are not as efficient in converting capital into profit.

Investors should be careful when using the ratio since capital assets, such as a refinery, can be depreciated over time. If the same amount of profit is made from an asset each period, the asset depreciating will make ROACE increase because it is less valuable. This makes it look as if the company is making good use of capital, though it is really not making any additional investments.


Investment dictionary. . 2012.

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Look at other dictionaries:

  • Return on capital employed — (ROCE) is used in finance as a measure of the returns that a company is realising from its capital employed. It is commonly used as a measure for comparing the performance between businesses and for assessing whether a business generates enough… …   Wikipedia

  • Return On Capital Employed - ROCE — A ratio that indicates the efficiency and profitability of a company s capital investments. Calculated as: ROCE should always be higher than the rate at which the company borrows, otherwise any increase in borrowing will reduce shareholders… …   Investment dictionary

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