Return on Capital Employed (Formula, Examples) | Calculate ROCE - YouTube

Hey folks welcome to wallstreetmojo's investment banking tutorial and today's topic is return

capital employed so basically the return on capital employed is the amount of earnings

before interest and tax which you have you know if you got Or which you have achieved by

employing a certain level of capital so when I say by employing a certain level of capital

I mean to say employing both the equity and debt right so as against the ROE we are only

the equity part in for the analysis while calculating ROCE what we do is we

take both the equity and debt part of the of the capital right so now the formula is

relatively simple what we need to do is so basically we need to be calculating EBIT

EBIT is earnings before interest and tax and we will we would also need capital employed so capital employed

can be calculated as total assets less current liabilities

total assets less current liabilities would give us a complete picture of the capital

employed right so let's get back to the website here and see what the computation here is

given as you can see the ROCE for home depot has been increasing from 2010 onwards

and it has been you know increasing at a very steady rate you know so there is from 2010 it was somewhere

in 60% level and from there on it has increased to 46.2% at the end of 2016 so this tells

us that you know home depot is really using you know its capital in a very constructive

manner right so let's look at some computation which is given here now if you see ROCE ratio

is net operating income ebit is also called operating income divided by total assets

less current liabilities right so now if you look at the revenue for the year so how would you

achieve a ebit so ebit is basically revenue less the opex so when I say opex I mean

operating expenditure right so all of the operating expenditure if you produce these

operating expenditures from the revenue you would get ebit right if you see the ebit for

this particular computation year the revenue is 3.3 million dollars less the COGS

which is cost of good Sold which is2.3 million this gives us the gross revenue as a million dollars and

then the direct cost is $400,000 and then the gross margin is this much and then the

rent and general and administrative expenses you know getting deducted as total expenses which

would give us $250,000 so gross margin is also called gross profit at time and this

less than $350,000 gave us $250,000 and this is ebit now once we have the ebit number

we can go ahead and open the balance sheet to calculate the capital employed capital

employed is a simple thing you know you needed total asset part this is given in the total

assets as the balance sheet and less the current liabilities current liabilities would be clubbed

in the current liabilities part and you know which is getting there so before showing your

computation life I would say that this particular ratio is applicable more in the in the companies

where in which are capital intensive right and capital intensive NIC capital intensive

I mean which I mean those companies which have a certain amount of debt in their books

that like utilities or you know some some mining company right season the kind of companies

which can be used to calculate ROC but some other company which is not that much of capital

intensive like some Biotech company or some small company you know it is not make sense to see to calculate

the ROC because primarily you know there would not be any debt assets ok any public company which

is the small right so now let us look at the computation of capital employed and return

on capital employed rather and then we can wrap this up so if you go to edgar you know

you would find the value for the value for capital employed for Colgate Palmolive so

let's let's look at Colgate Palmolive then lets go to edgar and type in the company name yeah so

this is the this is the company now if you look at the 8k or maybe 10k you know you would 10k

is basically the annual report so if you look at the 10k here for Colgate Palmolive you

would have something like selected financial data or maybe even just scroll down and look

at the value for look at the balance sheet and also the income statement to get the numbers

which we want so here is a net sales given and see

this operating profit to the total

operating profit for the company is for the year 15-16 and 17 years 2.7 bilion 3.8 million

and 3.5 million dollar now let me also see you in the in the income statement format

we don't have the income statement format given here, cash flow is given here and

the balance sheet balance sheet is given here now from balance sheet we can readily calculate

the calculate the capital employed of total assets is the value for total assets let

me just copy this line item so total assets is this value for this is the value for 17 and

this is the value for 16 now total assets less current liabilities current liabilities

for 2017 and 2016 is what we're looking for so 20 current liabilities total current liabilities

total current liabilities which we copied values and mind this numbers are in millions so you have to be so if it is 3408 million that means

it is 3.4 billion dollars and it is a huge company so 3.4 million and 3.3 billion now total assets less current

liabilities would give us what capital employed for 17 and 16 capital employed would be 9.2

billion dollars to 17 and in the same way 8.8 billion dollars for 16 right now we have

the denominator part of the equation the numerator part of the equation is it might be given

over here operating profit is given here in this is ebit and this is 3.5 billion

and 3.8 billion respectively for 17 and 16 so let me just know take this numbers above or let it be

here. Now ROCE would be what now ROCE would be this by capital employed ok now this is in points

this is in then the general format but let me put it in percentage terms. 38.72% is the ROCE for 17 and

43% was for 16 from16 to 17 the ROCE has been reduced now in the similar fashion

you would want to ex certain the ROC for the industry because this number this numbers

does not mean anything unless and until you have the value for the industry so what

you need to be doing is you need to go here and go to Google finance or may be Yahoo Finance

to find the company's industry and then you not take the values from there once

you have the values for there then you would be in a better position to you know relate

and compare the numbers right since Colgate Palmolive is a consumer good company you might

see it buy the tickets Symbol symbol for this all right yeah Colgate Palmolive India Limited

Colgate Palmolive company and NYC Colgate Palmolive company is transferred we need the

one which is this is NY this is India Limited this is this this is subsidiary of

the parent company we need this right, so if you come to the statistics

yeah so if you come to statistics you would see the return on assets return on equity

this are the management effectiveness ratios

and in the similar Fashion we got ROCE but it is not given here

and also if you look at

the profile you would see the sector as consumer goods and industries personal products

and now if you go to google finance i think i have opened it here

so just type in the finance

and or may be just type Colgate Palmolive

so this is what the company is and if you ;look at the

at the compare to go to compare you would find the the companies which are in the similar

sector so you can simultaneously calculate the value for Procter and gamble Unilever

Johnson and Johnson and Loreal and then you can compare it with the with what

you have for Colgate Palmolive right so in that way you would have a better understanding

of what we return on capital employed for for for Colgate Palmolive is with respect

to the other place in the market to reactivate once again you know return on capital employed

is it good profitability measure of a company and it will help you understand you know about

the company is with the company how the company is an employing its capital but at the same

time you need to be wary of those companies who have got lots of cash on their balance sheet

because if there is cash on the balance sheet you need to adjust that cash as well alright

so as of now it is easy to understand that return on capital employed is ratio of EBIT

and total capital employed which is nothing but total assets + current liabilities I hope

you enjoy this.