Return on Capital employed (ROCE)
Capital employed is basically the effective capital that is being used in the business. The average of the capital account for the year i.e. (opening capital + closing capital) ÷ 2 may be used as capital employed. Most people start a business with the hope to make satisfactory returns on their capital employed. The formula for capital employed is:
This shows that effective use of capital is very crucial to the success of a business. Company A has made a return of 30% net profit on its capital. Company B has only made a return of 10% net profit on its capital although it has three times the value of capital.