Financial Ratios Have A Lot Of Importance In The Analysis Of Any Company And In This Post, We Will Know The Very Popular And Important Ratio Return On Capital Employed (ROCE). We, Will, Know What Is Return On Capital Employed (ROCE), How It Is Calculated, And How We Should Use This ROCE Ratio.

Let Us Know What Is Return On Capital Employed (ROCE).

What Is Return On Capital Employed (ROCE)?

Friends, Return On Capital Employed Or ROCE Is A Profitability Ratio, Which Tells How Much Profit This Company Is Making On Its Total Capital Employed (Total Capital Employed).

Capital Employed Means That, How Much Total Capital The Company Is Using In Its Business.

Return On Capital Employed (ROCE) Formula

The Formula For Return On Capital Employed Is ROCE = EBIT/Capital Employed.

Where EBIT = Earnings Before Interest And Tax.

Earnings Before Interest And Tax Or What We Also Call EBIT Or Operating Profit, We Get It From The Income Statement Of The Company.

We Can Calculate The Same Capital Employed From The Balance Sheet.

How to Calculate Capital Employed?

Friends, We Can Calculate Capital Employed In Two Ways:

• पहला है Capital Employed = Total Assets – Current Liabilities
• और दूसरा है Capital Employed = Fixed Assets + Working Capital

The Same Formula Is Used For General Capital Employed.

For Example, Let’s Say There Is An AB Limited Company Whose Income Statement And Balance Sheet Are As Follows.

Friends, To Calculate Return On Capital Employed ROCE, We Need Two Things: Earnings Before Interest And Tax (EBIT) And CAPITAL EMPLOYED.

Here In The Statement Of Ab Ltd Income, Earnings Before Interest And Tax Is Rs 12 Crore. But We Have To Calculate The Capital Employed Of Ab Ltd.

We Will Use This Formula To Calculate
Capital Employed: Capital Employed = Total Assets – Current Liabilities

The Balance Sheet Of AB Ltd. Has Total Assets Of Rs.60 Crores And Current Liability Of Rs.5 Crores.

In This Way Capital Employed Will Be –

Capital Employed = 60 – 5 = 55 Crores.

How To Calculate Return On Capital Employed (ROCE)?

Let Us Now Calculate The ROCE Of AB Ltd.

ROCE = EBIT/Capital Employed

Here EBIT Is Rs 12 Crore And Capital Employed We Calculated Is Rs 55 Crore.

In This Way The Return On Capital Employed Of AB Limited Will Be:

ROCE = 12/55 = 0.2182 = 21.82%

Where To Find Return On Capital Employed?

Friends, We Do Not Need To Calculate The Return On Capital Employed Of Companies.

Return On Capital Employed Is A Very Important Ratio And For This Reason Companies Often Show It In Their Annual Reports. Also We Can See The ROCE Of Every Company On Many Websites Like Screener.In Or Moneycontrol.Com .

What Is A Good ROCE – What Is A Good ROCE For A Company?

Friends, ROCE Is Generally Considered As An Indicator Of STRENGTH Of Investors Business. And In General, ROCE Of More Than 15% Is Considered Good. If The ROCE Of A Company Is More Than 15% Every Year For The Last Seven To 10 Years In A Row, Then It Is Considered That The Company Is Very Strong In Its Business And Can Be A Good Investment In The Long Term.

But Friends, We Say This Again And Again And Will Keep Saying That We Should Never Invest In Any Company By Looking At Only One Ratio. We Should See Maximum Ratios In The Analysis Of Every Company. At The Same Time, Attention Should Also Be Paid To The Future Of The Company’s Products And Services. And When After All Kinds Of Analysis, We Find A Company Increasing It’s Business And Profit In The Future, Then Only We Should Invest In That Company.

Friends, To Be Successful In Investing, The Analysis Of The Company Is Necessary, But More Important Than This Is Our Discipline And Patient. Often When The Stock Market Starts Going Up, We Forget Our Discipline And Invest In Any Company Whose Share Price Is Increasing. Same If We Have Invested In A Company After Good Analysis And The Share Price Of That Company Starts Decreasing Then We Forget Our Profession And Also Sell The Good Company’s Share And Thus We Too With Time Only. Loss Makers Remain As Investors.

Forgetting Discipline And Patience In Other Stock Markets Can Be Very Dangerous For Our Wealth. And This Is The Biggest Reason Why Stock Marketers Suffer Losses. To Be Successful In The Investor’s Game, It Is Very Important That We Work On Our Player Analysis Skills As Well As Our Emotional Strength.

Let’s Say This Was Our Today’s Post On Return On Capital Employed (ROCE), In This, We Learned What Is ROCE, How It Is Calculated, And How We Should Use This Ratio.

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