Return on Capital Employed
Return on Capital Employed ratio is an indicator of the earning capacity of the capital employed in the business.This ratio is considered to be the most important ratio because it reflects the overall efficiency with which capital is used.
How to Calculate Return on Capital Employed?
It is calculated as follows:
Where Operating Profit = Profit before Interest and Tax
Capital Employed = Fixed Assets+Current Assets-Current Liabilities.
Capital Employed = Equity Share Capital+Preference Share Capital+Undistributed Profit+Reserves and Surplus+
Long-term Liabilities-Fictitious Assets-Non-business Assets
For example if the capital employed is Rs.5,00,000 and operating profit before interest and tax is 75,000, the return on capital employed will be calculated as follow:
Return on Capital Employed is a helpful tool for investors to get a clear picture of how the use of leverage impacts a company’s profitability. Financial analysts consider this ratio measurement to be a more comprehensive profitability indicator because it gauges management’s ability to generate higher return from a company’s total pool of capital.
Table of Contents
1) Profitability Indicator Ratios: Introduction
2) Profitability Indicator Ratios: Gross Profit Ratio
3) Profitability Indicator Ratios: Operating Profit Ratio
4) Profitability Indicator Ratios: Net Profit Ratio
5) Profitability Indicator Ratios: Return on Capital Employed
6) Profitability Indicator Ratios: Return on Equity
7) Profitability Indicator Ratios: Return on Assets