ROC = EBIT/Invested Capital Invested Capital = Current Assets-Current Liabilities-Cash. EBIT = Operating Profit (profit before interest and taxes)
ROC abbreviates Return on Capital and means return on invested capital.
The key figure shows the company's return on the investments made in the company. Investors want to know that the company can convert the invested capital into a good return.
ROC is used to see how efficiently the invested capital is used.
ROC is well-suited to industries that make large investments. If a company has a higher ROC than its competitors, the company is better at getting a return on its investments and can have a competitive advantage, or a so-called moat.
Compare companies within the same industry to get a sense of what constitutes a good ROC.
Things to keep in mind
- ROC should be as high as possible. This shows that the company can use its invested capital to create profitability.
- If the ROC is 15, then Operating Profit is 15% on invested capital.
- Non-recurring items can result in a misleading ROC.