Profitability Ratios: Return on Capital Employed

Return on Capital Employed is a financial metric that measures a company's profitability and the efficiency with which its capital is employed.

It is calculated by dividing the company's earnings before interest and taxes by its total capital employed.

This ratio helps investors understand how well a company generates profits from its capital.

A higher ratio indicates that a company uses its capital more effectively to generate earnings.

A lower ratio suggests that the company might need to improve its capital use effectively.

For example, suppose Delta Corp. has five hundred thousand dollars of earnings before interest and taxes, and its total capital employed, which includes equity and debt, is two million five hundred thousand dollars.

The return on capital employed would be calculated as twenty percent.

It means that the company generates twenty cents in profit for every dollar of capital employed.

Investors typically compare the return on capital employed by different companies in the same industry to determine which company is utilizing its capital more efficiently.