The Income|Outcome^® Contextuary

Ratio: Operating Income as a percentage of Capital Employed.

“What do you mean by that?”

Most definitions of ROCE use Operating Income or EBIT as the 'return', but the precise definition of Capital Employed can vary by company. There are multiple definitions for ‘capital employed’:

1. Calculation: Capital Employed = Shareholders' Equity + Long-Term Debt

Example: The Round Number Company Operating Income = 30; Shareholder Equity = 140; Long-Term Debt = 100 Return on Capital Employed = 30/(140 + 100) = 30/240 = 12.5 %

2. Calculation: Capital Employed = Total Assets - Intangible Assets - Current Liabilities

Goodwill is also an Intangible so it is included in the calculation.

Operating Income = 30; Total Assets = 300; Intangibles = 8; Goodwill = 20; Current Liabilities = 36 Return on Capital Employed = 30/(300 - 8 - 20 - 36) = 30/236 = 12.7%

3. Calculation: Capital Employed = Equity + Long-Term Liabilities

Operating Income = 30; Shareholder Equity = 140; Long-Term Liabilities = 124 Return on Capital Employed = 30/(140 + 124) = 30/264 = 11.4 %

4. Calculation: Capital Employed = Total Assets - Current Liabilities.

Operating Income = 30; Total Assets = 300; Current Liabilities = 36 Return on Capital Employed = 30/(300 - 36) = 30/264 = 11.4 %

5. Calculation: Capital Employed = Fixed Assets + Working Capital.

where Working Capital = Total Current Assets - Total Current Liabilities

Operating Income = 30; Fixed Assets = 168; Current Assets = 132; Current Liabilities = 36 Working Capital = 132 - 36 = 96 Return on Capital Employed = 30/(168 + 96) = 30/264 = 11.4%

6. Capital Employed = Total Assets - Current Liabilities - Cash and Cash Equivalents

Operating Income = 30; Total Assets = 300; Current Liabilities = 36; Cash = 20 Return on Capital Employed = 30/(300 - 36 - 20 ) = 30/244 = 12.3%

Definitions 3, 4, and 5 are different ways of expressing the same value. An ROCE calculation using one of these definitions is equivalent to Return on Net Assets (RONA).