ROCE stands for Return On Capital Employed. It underpins
economic growth and is the most important equation of our times.
All accounting students learn how
to calculate and use this equation within the details of corporate finance but
we are all familiar with the concept. ROCE is stated as follows:
ROCE = Returns
Investment
It calculates the ratio between an investment and the amount
of increase the investment earns. It is better known as a percentage rate of return. For example a company investing $10 million
in a new product and making $2 million profit a year enjoys a 20% ROCE. If PR
can afford to invest £10 in a savings account, he might make 20 pence in a
year; a 2% ROCE.
If more people are to enjoy getting returns out of
investments, then our economy needs to grow. This is the theory that motivates
pretty well all business people and political leaders in the West and in the
East. This makes ROCE an important equation – it represents our increasing
prosperity and source of additional wealth.
