Return on Average Capital Employed - ROACE

What is '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.

BREAKING DOWN '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.

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RELATED FAQS
  1. How can I calculate capital employed from a company's balance sheet?

    Discover how to define and then use a simple method to measure a company's capital employed by looking only at its balance ... Read Answer >>
  2. What does a high capital employed imply about risk?

    Learn what capital employed indicates about a company's operational risk level, and how the return on capital employed can ... Read Answer >>
  3. As an investor in stock, how should I evaluate a company's capital employed?

    Learn how to define, calculate and evaluate a company's capital employed. See how to use return on capital employed to compare ... Read Answer >>
  4. Why might two companies calculate capital employed differently?

    See why not every company defines and measures capital employed in the same manner, and which methods are most common in ... Read Answer >>
  5. What is the difference between ROCE and ROI?

    Understand the difference between return on capital employed and return on investment and how analysts use these performance ... Read Answer >>
  6. What are some ways a company can improve on its Return on Capital Employed (ROCE)?

    Discover how the return on capital employed ratio is used by analysts and investors to measure profitability, and how a company ... Read Answer >>
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