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How much does the business earn on all the money used to run it, borrowed or not?

Return on Capital Employed (ROCE)

Lesson 5 of 11 · Efficiency

ROCE is operating profit for every ₹100 of capital in the business, counting both the owners' money and loans.

In everyday life

Your stall runs on ₹80 of your own money and ₹20 borrowed from an uncle. ROE only looks at your ₹80. ROCE looks at all ₹100, so borrowing can't flatter it.

How it's worked out

Example: Sunrise Tea, a made-up company that sells packaged tea across India.

Operating profit
profit from the business itself, before paying interest and tax (also called EBIT)
₹220 Cr
Capital employed
all the money running the business: the owners' money plus borrowed money
₹1,250 Cr
× 100
ROCE
17.6%

In words: ₹17.6 of operating profit for every ₹100 running the business.

Try it yourself

Move the sliders and watch the answer, the picture and the verdict change together.

₹ Cr
₹0 Cr₹1,000 Cr
₹ Cr
₹50 Cr₹5,000 Cr
ROCEGood
17.6%

₹17.6 of operating profit for every ₹100 running the business.

  • Operating profit
  • The rest

Each dot is 1 of every 100 in “capital employed”.

Rough guide

ROCE 17.6%
  • Weak
  • Okay
  • Good

What's a good number?

  • Weak

    Up to 10%

  • Okay

    10% to 15%

  • Good

    Above 15%

ROCE should beat the interest rate the company pays on its loans. If it doesn't, borrowing is destroying value.

Key number in the sector guides for Pharma and FMCG.

How to read it

Good signs

  • ROCE higher than ROE usually means little debt.
  • Steady ROCE above 15% points to a business with an edge over rivals.

Watch out for

  • Not used for banks: for them, borrowing (deposits) is the raw material, so this formula doesn't fit.
All lessons

For learning only. Example companies are made up, and the rough guides are rules of thumb, not targets. Nothing here is advice to buy or sell any stock.