Return on Average Capital Employed - ROACE

AAA

DEFINITION of '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.

INVESTOPEDIA EXPLAINS 'Return on Average Capital Employed - ROACE'

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.

RELATED TERMS
  1. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders ...
  2. Return On Capital Employed (ROCE)

    A financial ratio that measures a company's profitability and ...
  3. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating ...
  4. Cash Flow Return on Investment ...

    A valuation model that assumes the stock market sets prices based ...
  5. Return On Assets - ROA

    An indicator of how profitable a company is relative to its total ...
  6. Inherent Risk

    The risk posed by an error or omission in a financial statement ...
Related Articles
  1. How To Decode A Company's Earnings Reports
    Fundamental Analysis

    How To Decode A Company's Earnings Reports

  2. Analyze Investments Quickly With Ratios
    Investing Basics

    Analyze Investments Quickly With Ratios

  3. ROA And ROE Give Clear Picture Of Corporate ...
    Markets

    ROA And ROE Give Clear Picture Of Corporate ...

  4. A Look At Corporate Profit Margins
    Markets

    A Look At Corporate Profit Margins

comments powered by Disqus
Hot Definitions
  1. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
  2. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  3. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  4. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  5. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  6. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
Trading Center