Return on capital employed
How much operating profit each unit of capital put into the business — by shareholders and lenders alike — brings in.
Formula
\frac{\text{EBIT}}{\text{Equity} + \text{Long-term liabilities}}The numerator is operating profit before interest and tax — otherwise the measure would depend on the financing structure it is meant to look past.
How to read the number
Answers whether the business earns more than its capital costs. If the return is below the cost of capital, growth destroys value rather than creating it.
When the metric lies
The denominator is at book value, so a company with old assets looks better than it is: the capital has long been depreciated while profit is still measured against it. A cyclical business looks brilliant at the top of the cycle, right before the turn.
Where it is used
The metric is calculated across every security in the catalogue and appears on the instrument card, in the multiples table and in the screener.
Also known as: return on capital employed, roce