ROCE and my understanding of Capital Employed

CFA General
#1

Hey guys, I have a hard time understanding what concretely happens to the Capital Employed. I’d appreciate anyone helping me to find the flaws in my logic :slightly_smiling_face: E.g. ROCE = EBIT / Capital Employed let’s say we have : ROCE = 100 000 000 / 190 000 000 = 52.63% Ok, cool, The company was able to generate a good profit based on the Capital Employed but what does actually happen to those 190M? I get that Capital Employed is a number with no big interest on it’s own but not fully understanding it keeps me away from understanding the ROCE result. So this amount of money that capital employed represents :

  1. Is that money that was spent in previous years and current year in any type of assets, R&D, etc that contributes to the company ability to earn revenue?
  2. Why a number such as the actual amount of money that was spent this current year by the company is not more interesting than the Capital Employed for ROCE?
  3. I guess I’m being by the word “Employed”. Do we agree that Capital Employed doesn’t represent the actual amount of money that was spent this current year by the company?
#2

Hi,

I am not sure if you have the correct understanding of capital employed. CE is rather the net sum of past operating investments (PPE plus NWC) and refers to the balance sheet rather than some kind of spending as you call ist.

ROCE ist than nothing else than bringing the earnings and investments together into one number by asking the question of how much operating profit did the company earn in a certain period with its capital employed in that period.

Regards,

Oscar

#3

This helped me to understand! Thanks Oscar