Return on Capital

Return on capital (ROC), also known as return on invested capital or return on total capital, refers to the profit on an investment in relation to how much was invested. It is the ratio of net operating profit of a company to its capital employed. Evaluating the financial performance of a business includes analysing the ROC.
A company’s ROC is an indicator of the size and strength of its ability to maintain competitive advantage over competitors to protect its long-term profits and market share from them. ROC indicates how effective a company is at turning capital into profits.

Return on Capital Definition

Is a financial ratio that measures a company’s profitability and the efficiency with which its capital is employed. ROC is a useful metric for comparing profitability across companies based on the amount of capital they use.

The Target

Greater than 15.00%

The Formula

ROC = EBIT (or Net Profit or Operating Profit)/Capital Employed

How to keep your Return on Capital above the target

A higher value of ROC employed is favourable. Thus, indicating that the company generates more earnings per dollar of capital employed. A lower value indicates lower profitability. A company having less assets but same profit as its competitors will have higher value of ROC employed and thus higher profitability.

In summary

It goes without saying you need to get a return on your capital.  But it’s not always that easy when there are so many influences.  However, focusing on maintaining profitability and carefully managing your assets are key actions to help you not just survive but thrive.
I encourage you to create a report or a dashboard that gives you all your figures whenever you need them.  If you don’t have the time or resources to make that happen then sign up for Blue Bean today and you’ll see your metrics within a few minutes.

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