Return on Capital Employed / Invested Capital??

What is the fundamental difference between Return on Capital Employed (ROCE) and Return on Invested Capital (ROIC)??

I have not really come across a consensus regarding this issue on the internet or amongst the finance professionals I know. Wanted to know A-Forumers’ views on this.

I would like to know too…

I feel that conventional efficiency metrics like RoA or RoE or ROIC are not that useful because they reflect a lot of sunk costs. I feel it is better to compare CFO to market cap + CapX+Acquisitions…but I’m still brainstorming on this. Essentially I’m thinking (FCFF-Acquisitions)/EV should better estimate efficiency.

For me, they both seem synonymous at times.

The best alternative explanation I feel is ROCE is to be looked at from a company’s perspective (i.e. how much money the company made by using capital available to it) and ROIC should be looked at from an investor’s perspective (i.e. how much money the company made for investors (inc. retention money) using capital raised by investors).

Formulawise, I suppose the numerator for both would be NOPAT (or NOPLAT) and there would be changes in the denominator. Invested Capital would perhaps not include current liabilities (like payables) and deferred tax liabilities.

I’m still shooting in the dark on this one. More perspective would be welcome.

ROCE gauges efficiency from a business operation point of view (and thus more operation focus). ROIC measures the efficiency of total capital deployed (and thus more investment focus).


ROCE = EBIT / (Net WC + Net FA)

ROIC = NOPAT / (Total Assets - Excess Cash - Non Int bearing Liabilities)

(Note: with ROCE there are implications around non cash charges and impairments, so need to be cautious)

@Trekker: Any reason why the numerator for ROCE is pre-tax? I was under the impression that it would be post-tax despite the fact that we are gauging the company’s ability to churn out a return from all possible sources of capital employed.

Well, since the firms operate with differing tax rates we don’t want it (and the interest) to have any influence or implication on the comparability aspect. And because ROCE is meant to be operation focused, the comparison should be made only on the basis of the firm’s ability to generate operating earnings against the tangible assets (the denominator).

What sort of application(s) are you using these ratios for?

I suppose the comparability argument makes sense here. It can be possible that the tax rates can be different for different companies in the same sector although I have rarely seen it so far.

I am using these ratios as part of a presentation to potential investors. Earlier, I used to use these as part of my equity research job where RoCE was a commonly computed ratio along with RoE. RoIC is rarely used in reports here, at least I haven’t seen them much.

Thanks for your explanation.

Yeah, if you’re comparing operational efficiency in regions with different tax regimes, it makes sense to use pre-tax figures.

Taxes will still come into play when dealing with valuation, but for operations, unless you are analyzing a company that makes its money by specifically exploiting a tax-law-dependent strategy, it’s probably best to leave taxes out for operations.