How do you calculate Return on Capital Employed (ROCE)?

The calculation of Return on Capital has several definitions depending on the source used. At Stockopedia we distinguish between the following three different methods of calculation:

  1. ROCE - 'Return on Capital Employed' - a plain vanilla version as reported on the StockReports, In the case ofROCE, the numerator is operating income and the denominator is 'capital employed' instead of total assets as in ROA. Capital Employed has many definitions unfortunately, but, in general it is the capital investment necessary for a business to function, often defined as fixed assets plus working capital, or total assets less current liabilities (which is what we use). See:

  2. ROCE Greenblatt - This uses a specific definition of Return on Capital Employed based on Joel Greenblatt's Magic Formula book (which is a quick and very good read that discusses return on capital in depth). As denominator it uses the sum of 'Net Working Capital' and 'Net Fixed Assets'. Net Working Capital excludes excess cash and 'non interest bearing payables', while Net Fixed Assets excludes goodwill and intangibles. These adjustments are quite specific and designed to come to a closer approximation of the genuine capital employed in the operating enterprise of the company. They are discussed in more detail in this article.

  3. ROIC - 'Return on Invested Capital' - a popular term more often used in the USA. In the case of ROIC, the calculation used is 'Net operating income after tax' / Invested Capital where Invested Capital = Total Equity + Total Liabilities - Current Liabilities - Excess Cash. (We use the Greenblatt definition of Excess Cash as cash at hand in excess of 5% of revenues).

Of course, there are swings and roundabouts with any definition, and this is all up for debate but these 3 are the current screenable data points at Stockopedia and illustrate how we're handling things at present.

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