ROCE and ROA: what the money put into the business earns
Whether a profit is large or small depends on how much was used to earn it. ROCE shows what the long-term money put into the business earned in a year; ROA shows what all the assets the company holds earned, both as percentages.
Formulas
- ROCE (return on capital employed) = operating profit ÷ (total assets − current liabilities)
- ROA (return on assets) = net profit ÷ total assets
- ROE (return on equity) = net profit ÷ equity
ROCE uses operating profit before interest and tax, so it measures the business itself regardless of how it is financed. ROA and ROE use net profit after interest and tax. Caveat uses year-end balances.
Worked example
Figures in units of 100 million KRW: total assets 18, current liabilities 5 (capital employed 13), equity 9, operating profit 3.2, net profit 2.4 (values calculated by the Caveat engine).
| Measure | Prior year | Current year |
|---|---|---|
| ROCE | 19.4% | 24.6% |
| ROA | 10% | 13.3% |
| ROE | 20.5% | 26.7% |
Every 100 put into the business earned about 25 of operating profit in the year.
How to read it
- Against the cost of funding: if ROCE exceeds the borrowing rate, growing with borrowed money adds to the owners' share; if it is below, borrowing more loses money.
- The gaps between them: high ROCE with low ROA means interest, tax or non-operating losses take a large share. ROE far above ROA means heavy use of debt (see DuPont analysis).
- Heavy assets: if asset turnover is low, fixed-asset turnover (revenue ÷ net PP&E) shows whether equipment or other assets are the weight.
Both sides: right after heavy investment assets rise before profits follow, so ROCE dips for a while. Conversely, not replacing old equipment shrinks assets through depreciation and flatters ROCE. Read it with the timing of investment.
Limitations
- ROCE is not calculated when current liabilities exceed total assets, leaving capital employed at zero or below.
- Year-end balances differ from average balances in years when assets changed a lot.
- For reference only; it does not replace credit, investment or tax decisions.
See it in your own statements
Upload a balance sheet and income statement and Caveat calculates these for your company.
FAQ
- How do ROCE and ROE differ?
- ROCE divides operating profit before interest and tax by all long-term money in the business, borrowed included, to measure the business. ROE divides final net profit by the owners' equity to measure what shareholders earn.
- What ROCE is good?
- There is no fixed threshold. Check whether it beats the borrowing rate or required return, how it compares with the industry, and its trend.
- Low ROA but high ROE — is that good?
- It may mean heavy borrowing is lifting ROE. If profits fall, ROE falls faster, so check the debt-to-equity ratio and interest coverage.
- Which figures are needed?
- Total assets, current liabilities, equity, operating profit and net profit.
Country notes: Korea
- Can a Korean sole proprietor's ROA and ROE be compared with a corporation's?
- Net profit on the Korean sole-proprietor standard statement is before income tax, so ROA and ROE come out higher than for corporations. Allow for that difference when comparing.