Return on Capital Employed (ROCE)

Return on capital employed is ROIC's pre-tax cousin: EBIT divided by capital employed, where capital employed is total assets minus current liabilities. It answers the same question — how productively does the business use the capital locked inside it — but with two practical differences: the numerator is before tax, and the denominator comes straight off the balance sheet with no adjustments.

The pre-tax framing is the point for cross-border comparison. Tax rates vary by country and by year, so ROCE lets you compare a U.K. industrial against a German one without tax regimes muddying the operating picture — which is why the metric dominates in British and international equity analysis, while U.S. analysts default to ROIC. Terry Smith of Fundsmith made "high sustained ROCE" the first filter of a widely followed quality checklist.

As with ROIC, the benchmark is the cost of capital and the enemy is mean reversion. A ROCE persistently above roughly 15% signals pricing power or capital efficiency competitors cannot copy; a single great year usually just signals the top of a cycle.