Which is the correct formula for ROCE (Return on Capital Employed)?

• A. Operating profit / capital employed x 100
• B. Net income / Total assets x 100
• C. Earnings before interest and taxes / Equity
• D. Operating cash flow / Invested capital x 100

Answer: (A)

ROCE shows how efficiently a business uses its long-term capital to generate operating profit. The correct formula uses operating profit (earnings before interest and taxes) divided by capital employed, with a 100 multiplier to express the result as a percentage. This focuses on the core operations and the funds invested to run them, excluding financing effects and tax impacts from the numerator.

Capital employed represents the funds supporting operations, typically equity plus long-term debt (or total assets minus current liabilities). Expressing it this way allows ROCE to reflect the efficiency of using long-term capital to generate profits from operations.

Other formulations would measure different things: using net income would reflect after-tax and financing results (not ROCE); using EBIT over equity would be return on equity; and using operating cash flow with invested capital shifts the focus to cash generation rather than accounting profitability.