Return on Capital Employed (ROCE)

The ROCE is the second type of ROI. It is similar to the ROA except in. one respect. Here the profits are related to the total capital employed. The term capital employed refers to long-term funds supplied by the  landers and owners of the firm. It can be computed in two ways. First, it is equal to non-current liabilities (long-term liabilities) plus owners equity. Alternatively, it is equivalent to net working capital plus fixed assets. Thus, the capital employed basis provides a test of profitability related to the sources of long-term funds. A comparison of this ratio will similar firms, with the industry average and over time would provide, sufficient insight into how efficiently the long-term funds of owners and lenders are being used. The higher the ratio, the more efficient is the use of capital employed.

The ROCE can be computed in different ways, using different concepts of profits and capital employed. Thus,

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