Return On Capital Employed

The return on capital employed or ROCE is a financial ratio that is used to determine how much money a company makes with a given investment. Unlike the ROE ratio this ratio factors in both equity and debt.

Formula should look like this

ROCE = (Net Income) / (Capital Invested)

The higher percentage a company makes the greater the odds of them being a good investment. In other words a company that takes $10 million dollars to make $3 million will look better then a company that takes $50 million to make $3 million.

The Return on capital employed ratio gives you an insight to which companies make the most bang for their bucks.

However just comparing this number with other companies may not give you a fair idea of the company itself. Some industry groups will outperform other industry groups.

In one market you may not need to invest a lot of money to make a large profit. In another market you may need to invest a lot of money just to keep things going and you are running on a very tight profit margin.

To keep everything fair and to get a good estimate of the company this number should be compared with other companies in the same industry group to get an idea of how great of a buy the stock really is.

Other Ratios

A good way of getting to know the fundamentals of a company would be to compare different ratios and examine them together. Here are some ratios which can give you a good idea of how well off a given company is.

Return on Equity - This ratio measures the return of the company based on the equity of the stock.

Cash Current Debt Coverage – This ratio tells you how prepared a company is to meet its short term debt

Return on Assets - This ratio examines the return that a company makes on its assets.