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Return on Capital Employed (ROCE) is a financial ratio that measures a company's ability to earn a return on all of the capital it employs.

ROCE is calculated as:

Earnings Before Interest and Tax (EBIT) / Capital Employed

EBIT is a company’s revenue minus its cost of goods sold and operating expenses. Capital employed is total assets minus current liabilities.

Typically, the higher the ROCE, the better, because a higher number means the company is using capital more efficiently, which helps create value for stockholders. Examining the ROCE of different companies is one way investors can compare companies and decide what to invest in. Examining the same company’s ROCE from year to year is also useful for spotting performance trends; ideally, ROCE will be stable or growing.

Consider two utility companies, each with $500 million in revenue. Electro Inc is an electric company with EBIT of $40 million. Light Corp is the main competitor with EBIT of $20 million. So far, Electro Inc looks better because it is more profitable. Electro's capital employed is $200 million, and Light Corp’s capital employed is $80 million. Electro's ROCE would be 20%, while Light Corp ROCE would be 25%. While both companies have the same revenue of $500 million, because Light Corp generates a higher return for the amount of capital employed, it could be considered more efficient, and possibly a better investment. 

While ROCE is an important measure for assessing a company's efficiency, no single ratio tells the whole story. It is important that analysts and investors come to a conclusion based on multiple ratios and industry or economic outlooks.

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