What is return on capital employed and how does it differ from ROIC?

Question

AcadiFi · Accepted Answer

Return on capital employed (ROCE) and return on invested capital (ROIC) are closely related but not identical. The differences come from the numerator definition and the denominator scope.

ROCE = EBIT / (Total Assets - Current Liabilities)

ROIC = NOPAT / (Debt + Equity - Cash)

ROCE uses EBIT (pre-tax), making it useful across differing tax jurisdictions. Its denominator, capital employed, equals total assets minus current liabilities, approximating long-term financing.

ROIC uses NOPAT (EBIT × (1 - tax rate)), which captures after-tax operating returns, and a denominator defined as invested capital (interest-bearing debt plus equity, less excess cash).

For Stonehaven Chemicals:

- EBIT = $340M, Tax rate = 25%, NOPAT = $255M
- Total Assets = $2,800M, Current Liabilities = $520M
- Capital Employed = $2,280M
- Debt = $800M, Equity = $1,200M, Excess Cash = $80M
- Invested Capital = $1,920M

ROCE = 340 / 2,280 = 14.9%
ROIC = 255 / 1,920 = 13.3%

When to use each:

- ROCE: cross-border peer comparisons where taxes differ materially.
- ROIC: comparisons against after-tax cost of capital (WACC) to judge value creation.

Always disclose which you are using and why. Mixing them in a single model is a common mistake.

What is return on capital employed and how does it differ from ROIC?

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