what does return on average capital employed tell you 
return on average capital employed roace is a useful ratio when analyzing businesses in capital intensive industries such as oil businesses that can squeeze higher profits from a smaller amount of capital assets will have a higher roace than businesses that are not as efficient in converting capital into profit the formula for the ratio uses ebit in the numerator and divides that by average total assets less average current liabilities fundamental analysts and investors like to use the roace metrics since it compares the company s profitability to the total investments made in new capital example of how roace is usedas a hypothetical example of how to calculate roace assume that a company begins the year with 500 000 is assets and 200 000 in liabilities it ends the year with 550 000 in assets and the same 200 000 in liabilities during the course of the year the company earned 150 000 of revenue and had 90 000 of total operating expenses step one is to calculate the ebit ebit r o 1 5 0 0 0 0 9 0 0 0 0 6 0 0 0 0 where r revenue o operating expenses begin aligned text ebit text r text o 150 000 90 000 60 000 textbf where text r text revenue text o text operating expenses end aligned ebit r o 150 000 90 000 60 000where r revenueo operating expenses the second step is to calculate the average capital employed this is equal to the average of the total assets minus the liabilities at the beginning of the year and the end of the year cb 5 0 0 0 0 0 2 0 0 0 0 0 3 0 0 0 0 0 where cb capital employed beginning of year begin aligned text cb 500 000 200 000 300 000 textbf where text cb text capital employed beginning of year end aligned cb 500 000 200 000 300 000where cb capital employed beginning of year ce 5 5 0 0 0 0 2 0 0 0 0 0 3 5 0 0 0 0 where ce capital employed end of year begin aligned text ce 550 000 200 000 350 000 textbf where text ce text capital employed end of year end aligned ce 550 000 200 000 350 000where ce capital employed end of year ac 3 0 0 0 0 0 3 5 0 0 0 0 2 3 2 5 0 0 0 where ac average capital employed begin aligned text ac frac 300 000 350 000 2 325 000 textbf where text ac text average capital employed end aligned ac 2 300 000 350 000 325 000where ac average capital employed lastly by dividing the ebit by the average capital employed the roace is determined roace 6 0 0 0 0 3 2 5 0 0 0 1 8 4 6 begin aligned text roace frac 60 000 325 000 18 46 end aligned roace 325 000 60 000 18 46 the difference between roace and rocereturn on capital employed roce is a closely related financial ratio that also measures a company s profitability and the efficiency with which its capital is employed roce is calculated as follows roce ebit capital employed begin aligned text roce frac text ebit text capital employed end aligned roce capital employedebit capital employed also known as funds employed is the total amount of capital used for the acquisition of profits by a firm or project it is the value of all the assets employed in a business or business unit and can be calculated by subtracting current liabilities from total assets roace on the other hand uses average assets and liabilities averaging for a period smooths the figures to remove the effect of outlier situations such as seasonal spikes or declines in business activity limitations of roaceinvestors should be careful when using the ratio since capital assets such as a refinery can be depreciated over time if the same amount of profit is made from an asset each period the asset depreciating will make roace increase because it is less valuable this makes it look as if the company is making good use of capital though in reality it is not making any additional investments 