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. It is calculated as follows:

return on capital employed

Where Operating Profit = Profit before Interest and Tax

Capital Employed = Fixed Assets+Current Assets-Current Liabilities.

Alternate method:-
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

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.

NEXT - Profitability Indicator Ratios: Return on Equity

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


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