What is ROCE?
ROCE is a profitability ratio. It’s calculated by dividing the net profit by the average capital employed (i.e., total assets minus total liabilities).
This is a good way of assessing how well a company is performing compared to its competitors, because it tells you how much cash you can expect to see in your pocket given what’s been invested in the business. If you’re looking for investments with high returns, then companies with higher ROCE values are ones you should consider investing in.
What is a ROCE Calculator?
A ROCE calculator is a tool that allows you to calculate the return on capital employed (ROCE) of a company. The ROCE is a measure of how well a company is performing, and it’s calculated by dividing the net operating profit after tax (NOPAT) by its total average capital invested in assets during the period.
The higher this ratio, the better your company has performed. This makes sense because more profit means there was more work done with less money spent, which means greater efficiency – or higher productivity per dollar invested in assets.
How to Calculate ROCE?
ROCE is a measure of the return on investment. It is important because it shows how much money a company makes from its capital (i.e., shareholders’ equity). The formula for calculating ROCE is:
Net profit after tax / Average Shareholders’ Equity
As you can see, this calculation has three components: net profit after tax, average shareholders’ equity and return on investment (ROI).
What does the ROCE ratio tell us?
The ROCE ratio is a measure of how well a company is using its capital. It’s also a measure of profitability, since it measures profits against invested capital. In essence, it compares the return on invested capital with your company’s cost of capital (the rate at which your company could have borrowed money).
As such, this ratio gives you insight into how well your business is doing in relation to its competitors and the market at large.
ROCE can be used as an indicator of whether or not a firm is over-leveraged and should make changes to its operations or balance sheet before things get out of control.
How Does this ROCE Calculator Work?
The ROCE calculator uses the following formula:
ROCE = (Net Profit After Tax / Total Assets) x 100
The formula is applied to the company’s income statement and balance sheet. The total assets figure comes from their balance sheet, which you can find on their website or financial statements. Net profit after tax is taken from their profit and loss account in their annual report or accounts for a specific period.
How do companies improve their ROCE?
Companies can improve their ROCE by:
- Increasing revenue.
- Decreasing costs.
- Increasing assets.
- Increasing liabilities.
- Increasing equity.
- Increasing cash flow and profit (and net profit).
Example of ROCE Calculator
To calculate the return on capital employed, you need to have access to the income statement and balance sheet of a company. The cash flow statement is optional and can be used to check if there are any discrepancies between your calculation and the actual ROCE ratio.
Enter all required data into our ROCE calculator:
- Income Statement (in USD)
- Balance Sheet (in USD)
And click ‘Calculate’. You will get:
For example, an auto repair shop might have $10 million worth in total assets: $2 million in buildings, $4 million in land and $6 million in equipment. If they make a profit of $100k last year, their ROCE would be ($100k/$10m)*100% = 10%.
You may have heard that “return on investment” (ROI) is more important than return on equity (ROE), but this isn’t true—in fact, ROE is more relevant because it takes into account both debt and equity. If we want to know whether our company has made money by actually investing in assets like machinery and buildings, then we need some way of measuring how well those investments performed over time.
Conclusion
ROCE is a good measure of the performance of a company or business. It’s a useful way to evaluate financial statements, and it can help you see where your business is headed long-term. The formula for calculating ROCE is pretty straightforward, but there are some nuances that you should be aware of before diving into calculations.
One thing to keep in mind is that different industries have different benchmarks for what constitutes an acceptable level of profitability—for example, if your industry averages 15% return on equity (ROE), then anything above that would be considered good. But if there’s no benchmark standard established yet in your sector (such as with start-ups), then 20% might just seem like an average amount!
FAQs
What is a good ROCE percentage?
The ROCE is calculated by taking the net operating profit after tax (NOPAT) and dividing it by the total equity. In general, a good ROCE is 20%. Anything between 15% and 20% is considered strong, 10% or more is weak, and below 5% is very weak.
Is 20% a good ROCE?
Is 20% a good ROCE? 20% is a good return on capital employed (ROCE), which is simply another name for profitability. It’s also a measure of success as it shows how much value your company generates from its assets and equity.
What is a strong ROCE?
When working with your ROCE calculator, you should aim for a strong return on capital. This means that the ratio should be over 15% and preferably above 30%. If your ROCE is under 10%, that’s when you might want to start thinking about cutting costs or restructuring your business model.
