Return on capital employed
Return on capital employed (ROCE) is a key investment appraisal technique that measures how efficiently a project generates returns relative to the capital invested.
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In this lesson
- 0:00 Return on capital employed overview
- 0:22 ROCE in investment decision making
- 1:07 ROCE calculation and worked example
- 1:43 When to use ROCE in practice
- 2:46 Limitations of accounting rate of return
About this lesson
You'll learn how to calculate ROCE as average annual accounting profit divided by average investment, compare it against your organisation's internal targets to decide whether to accept or reject a project, and understand when it's most useful—and where its limitations lie. This metric appears across CIMA and ACCA papers including Performance Management, Advanced Performance Management, and Strategic Business Leader, where investment decisions are a core assessment area. While ROCE is straightforward to calculate and expresses results as a familiar percentage, you need to recognise its key weaknesses: it relies on subjective accounting profits rather than actual cash flows, and it produces only a relative figure that doesn't account for project size, making direct comparisons between investments of different scales potentially misleading.
Duration: 4m
Transcript
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