Return on Capital

A measure of the profitability of a business, especially a capital-intensive business. Return on capital employed [ROCE] or return on net assets [RONA] calculates the ratio of net profit before interest and tax divided by total assets less current liabilities. This measures two aspects of performance: net profit margin and net asset turnover. If the reason that shareholders invest in a business is to achieve a higher rate of return for their money than they can achieve by placing the money in a bank, it is reasonable to assume that they expect that business will measure the actual return on capital and compare that with the expectation of shareholders. When the return on capital is greater than the weighted average cost of capital the company is creating value. When it is less than the cost of capital, value is being destroyed. See also Economic Value Added, Profit and Ratio, Profitability.