Return on capital employed (ROCE) and return on assets (ROA) are two similar profitability ratios investors and analysts use to evaluate companies. The ROCE ratio is a metric that evaluates how efficiently a company’s available capital is utilized.
The formula to calculate ROCE is as follows:
ROCE=earnings before interest and tax, or EBIT ÷ capital employed
Capital employed is defined as total assets minus current liabilities or total shareholders' equity plus debt liabilities. Therefore, it is similar to the return on equity (ROE) ratio, except it additionally includes debt liabilities. The higher the ROCE ratio, the more efficiently a company makes use of its available capital to generate profits. The ROCE ratio is especially useful for comparing similar capital-intensive companies. A good ROCE ratio for a company should always be higher than its average financing interest rate.
The ROA is similar to the ROCE ratio in that it measures profitability and financial efficiency. The difference is that the ROE ratio focuses specifically on the efficient use of assets. The ROA ratio divides annual earnings by total assets to indicate how much revenue per dollar is generated in relation to the company's assets. It is calculated using the following equation:
ROA=net income÷total assets
A high value of the ROA ratio is a strong indication a company is functioning well, making significant returns from current assets. As with other profitability ratios, the ROA is best used to compare similar companies in the same industry.
The differences between the ROCE ratio and the ROA ratio are not many, but they are significant. Different profitability ratios exist precisely to enable investors and analysts to evaluate a company's operational efficiency from various perspectives to obtain a fuller picture of a company's true value, financial condition and growth prospects.