Return on capital employed is used as a measurement of the performance of a division of a company. It assumes that the division is not responsible for its financing and income taxes. (Financing and income taxes are the responsibility of the division’s headquarters or executive’s office.) With that in mind, ROCE is calculated as follows:
The division’s Operating Income (before income taxes and before interest expense) divided by the Assets Employed at the division.
This calculation is very similar to return on investment (ROI) and could be broken down to be: [Sales divided by Assets Employed] times [Operating Income before taxes and interest divided by Sales] = Operating Income divided by Assets Employed = ROCE.
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