What ROCE means

ROE only looks at shareholders’ own money. But most companies run partly on borrowed money too — a term loan, working capital debt. ROCE — Return on Capital Employed — asks the bigger question: how much profit did the business generate on all the capital invested in it, whether that capital came from shareholders or lenders?

Capital employed = equity + borrowings — everyone who’s put money into the business expecting a return on it (lenders, long-term and short-term, as well as owners). You’ll also see it defined as total assets minus current liabilities; the two versions land close to each other but aren’t identical. And because that capital belongs to lenders too (who get paid via interest, before shareholders see anything), ROCE uses EBIT — earnings before interest and tax — instead of PAT (profit after tax), so the return isn’t already net of what’s owed to one of the two groups who supplied the capital.

The formula

ROCE (%) = EBIT / Average Capital Employed × 100
Capital Employed = Total Equity + Total Borrowings

As with ROE, we average the opening and closing capital employed rather than using the closing figure alone.

Worked example: Desi Bites Foods, FY25

  ₹ Lakh
EBIT (FY25) 326
Capital employed, start of year (FY24) 1,013
Capital employed, end of year (FY25) 1,078
Average capital employed 1,045.5
ROCE 31.2%

Worked example: Britannia Industries, FY25

From Britannia Industries’ audited consolidated FY25 results (year ended 31 March 2025, filed 8 May 2025). Total equity here includes non-controlling interests, since capital employed is a whole-business measure, not an owners-only one. For illustration only.

  ₹ Crore
EBIT (FY25) 2,873.81
Capital employed, start of year (FY24) 6,007.23
Capital employed, end of year (FY25) 5,606.09
Average capital employed 5,806.66
ROCE 49.5%

One quirk: EBIT here leaves out Britannia’s other income (such as interest on its cash and investments), but that cash still sits inside capital employed — so for a cash-rich company, ROCE on this basis runs slightly low.

Notice Britannia’s ROCE (49.5%) is close to, but a little below, its ROE (52.5%) from the previous post. It’s tempting to read that as “ROE isn’t being pumped up by borrowing” — but that comparison isn’t fair. ROCE uses EBIT, which is before tax; ROE uses PAT, which is after tax. To compare like with like, take tax off ROCE first.

  Desi Bites Britannia
ROCE (pre-tax) 31.2% 49.5%
Effective tax rate (FY25 tax ÷ PBT) 25.1% 25.6%
Post-tax ROCE = ROCE × (1 − tax rate) 23.4% 36.8%
ROE (post-tax) 34.0% 52.5%

(Using each company’s FY25 effective tax rate is a simplifying assumption — it applies the same rate to all of EBIT.)

On a like-for-like basis, ROE sits well above post-tax ROCE for both companies. That gap means part of the return to shareholders comes from funding beyond their own equity — borrowings, but also things like money owed to suppliers, which capital employed doesn’t count at all. It isn’t a red flag by itself, but it does mean ROE alone overstates how efficiently the business turns capital into profit — which is exactly why ROCE is worth checking. The upcoming posts on debt-to-equity and the equity multiplier pick up how much of ROE comes from that extra funding.

🧒 Explain it like I'm 10 (optional — skip if this is already clear)

Imagine two friends open identical lemonade stands. Friend A used ₹1,000 of her own savings. Friend B used ₹500 of his own savings and ₹500 borrowed from his dad. If both stands make the exact same ₹300 profit before paying dad back any interest, judging them only on “return on my own money” makes Friend B look like the better businessman — his ₹500 “earned” 60%, versus Friend A’s ₹1,000 earning 30%. But that’s not because Friend B ran a better stand — it’s because he used less of his own money. ROCE looks at the ₹1,000 total in both stands, so it judges the lemonade-selling skill itself, not who financed it.

Common mistakes

  • Comparing pre-tax ROCE with post-tax ROE. ROCE is built on EBIT (before tax), ROE on PAT (after tax), so “ROCE is close to ROE” proves nothing about leverage. Take tax off ROCE first. If ROE is still clearly higher than post-tax ROCE — as it is for both companies above — funding beyond equity (debt, supplier credit) is doing some of the work. Worth understanding before assuming the business itself is that efficient.
  • Using EBITDA instead of EBIT in the numerator. EBITDA leaves out depreciation — the cost of plant and machinery wearing out — and that’s a real cost of the very capital ROCE is measuring. EBIT includes it, which is why ROCE uses EBIT.
  • Using closing capital employed instead of average, especially in a year with a large mid-year capital raise or debt repayment — this can distort the ratio significantly in either direction.
  • Treating a high ROCE as a reason to buy at any price. ROCE measures business quality, not value for money — a genuinely excellent business can still be a poor investment if bought at too high a price. That’s a separate question, covered in the valuation posts.

Takeaway: ROCE measures the return a business generates on all the capital invested in it — equity and debt alike — making it a fairer way to judge operating quality than ROE alone, which can be flattered by leverage.