ROCE

ROCE is computed as EBIT (earnings before interest and tax) divided by capital employed, where capital employed equals total assets minus current liabilities. By including both debt and equity in the denominator, ROCE reflects the true return generated on all the capital that has been put to work in the business, regardless of how that capital was financed.

For Indian companies in capital-intensive sectors — power generation, roads, cement, chemicals — ROCE is especially revealing. A cement company like UltraTech Cement maintained a healthy ROCE through disciplined capacity additions and pricing power in a consolidating industry. Analysts compared its ROCE against its weighted average cost of capital (WACC); a company consistently earning above its WACC destroys no economic value and is adding shareholder wealth.

ROCE is also useful for comparing companies within the same industry when their capital structures differ. One infrastructure developer might be heavily leveraged while another is mostly equity-funded. Their ROEs would be incomparable without considering leverage; ROCE levels the playing field. SEBI-registered research analysts frequently highlight ROCE trends in their sector notes to identify which players are most efficiently converting capital into earnings.

A deteriorating ROCE trend despite stable revenue growth can signal that a company is facing diminishing returns on new investments — perhaps expanding into lower-margin geographies or investing in assets that are not fully utilised. Conversely, a rising ROCE over a multi-year period suggests improving capital allocation by management.

One important Indian context: many holding companies and conglomerates consolidate subsidiaries with disparate profitability profiles, which can obscure individual business unit ROCE. Disaggregating the segment-level ROCE — available in the segment reporting notes of annual reports — gives a clearer picture of where returns are being generated and where capital is being destroyed.