What does the Return on Capital Employed (ROCE) formula calculate?

The Return on Capital Employed (ROCE) formula is designed to assess a company's efficiency at generating profits from its capital. The formula is calculated as profit from operations divided by capital employed, multiplied by 100 to express the result as a percentage. This metric provides valuable insight into how well a company is using its capital to generate earnings, which is crucial for investors and management assessing operational performance.

The focus on profit from operations ensures that the calculation reflects the core business performance, excluding variables such as interest and taxes that might affect net profit but are not central to operational efficiency. Capital employed is typically defined as total assets minus current liabilities or total equity plus long-term debt, indicating the total amount of capital invested in the business.

This percentage helps stakeholders understand the return they are receiving from their capital investments, making it a key indicator for evaluating financial health and performance.

Other options do not align with the definition of ROCE: profit after tax to total equity assesses returns on equity, current assets to current liabilities indicates liquidity rather than profitability, and inventories to cost of sales measures inventory management efficiency over time. Thus, the correct choice accurately represents the essence of the ROCE calculation.