Return on capital employed (roce) and return on assets (ROA) are two similar return ratios investors and analysts use to evaluate companies. The coefficient of return on investment is a measure that assesses how effectively the existing capital of the company is used.
The formula for calculating the return on investment is as follows:
The roce = profit before interest and taxes or EBIT totaled ÷ capital
Capital employed is defined as total assets minus current liabilities or total shareholders ‘ equity and debt. Thus, it is similar to return on equity (return on equity), except it further includes a debt. The higher the ratio return on capital, the more efficiently the company uses capital to generate profits. Ratio roce is especially useful for comparison with similar capital-intensive companies. Good value income on invested capital for the company should always be higher than its average financing interest rate.
ROA is similar to the ratio of roce is that its profitability indicators and financial efficiency. The difference is that the profitability of capital, special attention is paid to the efficient use of assets. Return on assets divides the annual return on total assets indicates how much revenue is generated per dollar against the assets of the company. It is calculated using the following equation:
ROA = net income ÷ total assets
A high value of return on assets is a strong indicator that the company is working well, making a significant profit from current assets. Like other indicators of profitability, ROA is better to use for comparison with similar companies in the same industry.
The differences between the ratio of return on investment and return on assets are not many, but they are essential. There are different indicators of profitability, precisely in order to allow investors and analysts to assess the effectiveness of the company’s operations from various points of view to get a more complete picture of the true value of the company, the financial condition and growth prospects.