Return on Capital Employed (ROCE) compares earnings with capital invested in the company. It is similar to Return on Assets, but takes into account sources of financing.
We calculate this as Operating Income (more or less EBIT) divided by Capital Employed which we define as Fixed Assets + Working Capital or, said another way, Total Assets minus Total Current Liabilities. So, in the case of Vodafone, for example, on a TTM basis, the calculation for 2013 would be:
For the avoidance of doubt, this operating income number is stated post exceptionals because of the scope for manipulation and/or managerial subjectivity and discretion in the exceptional items number (companies tend to highlight exceptional losses but not exceptional gains).
It is also post the amortisation of intangibles, and intangibles are correspondingly included in the capital employed figure (this is debatable and there's a good Signet discussion piece on it here - but it's worth remembering that not all intangibles are goodwill and do often relate to the productive capacity of the firm). We also provide Greenblatt ROC which measures the return on tangible capital only.
A high double digit figure often means that the company has a defensible edge versus its competitors (e.g. a strong brand or a unique product). However, because ROCE measures return against the book value of assets, it's worth bearing aware that depreciation can flatter ROCE even though cash flow is constant. This is not the case with ROIC.