Operating profit divided by capital employed (total assets minus current liabilities) — measures how efficiently a business generates profit from all capital deployed in the business.
Deeper Explanation
ROCE differs from ROE in that it includes both debt and equity in the denominator, making it a purer measure of operational capital efficiency rather than financial engineering through leverage. A business with high ROE but low ROCE is achieving returns primarily through debt rather than operational excellence — a fragile foundation. Sustained ROCE above 15% across a full business cycle is evidence of a genuine competitive advantage. Declining ROCE over time — particularly when revenue is growing — signals that the business must deploy ever more capital to generate each additional unit of profit, a sign of moat erosion.
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