It is a method of calculating returns an entity earns on the capital it has invested in the business. Every business needs funds to source its operations. The company receives these funds in the form of equity and debt. And for this purpose, such invested funds in the business are referred to as capital employed. Return on the capital employed calculator is an online tool for calculating returns that a company earns on such capital investment.
The formula for calculating return on capital employed (ROCE) is as follows:
Return on Capital Employed = EBIT / Capital Employed
Some people also use the NOPAT (Net Operating Profit after Tax) instead of EBIT (Earnings before Interest and Taxes).
Return on Capital Employed Calculator
How to Calculate using Calculator?
The user has to provide the following data into the return on capital employed calculator for a quick calculation.
EBIT – It refers to the earnings of an entity prior to meeting interest and tax obligations. Since we are calculating returns for all the capital providers in common, the formula considers such earnings that are available for all the capital providers. Hence, EBIT is that portion of earnings or profits from which, at first go, the debt holders receive their interest. And, after paying taxes from the leftover earnings, preference shareholders receive their dividends. Further, in the end, equity shareholders receive their Dividends.
Also, the denominator consists of all the capital invested in a business, so to maintain parity between numerator and denominator, we consider EBIT in the formula, which excludes interest payouts.
Capital Employed – Capital employed means the total capital that a company invests in its business to continue its operations. It includes funds raised for a period of more than one year. Therefore, current liabilities are not a part of it. It is a sum total of the company’s share capital plus reserves and surplus plus long-term borrowings less preliminary expenses, if any.
One more approach to calculate capital employed is:
Capital Employed = Total Asset – Current Liabilities
The above formula can be written as:
Capital Employed = Fixes Assets + Current Assets – Current Liabilities
i.e., Capital Employed = Fixed Assets + Working Capital
Again it can also be expressed as:
Capital Employed = Non-Current Assets (basically all long term assets) + Working Capital