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Return on Capital Employed or ROCE means earnings before interest and tax (EBIT) divided by the capital employed (shareholder’s equity plus the ‘net debt’).

This ‘net debt’ reflects the debt capital injected into the business, and is calculated by netting off all the interest-bearing debt against any cash surplus to operating requirements.

ROCE identifies -

(i)         how much cash would be required to buy all the assets needed for the underlying business (at cost); and

(ii)        performance of the business, quite apart from how the parent company which has chosen to finance it.