Return on Employed Capital (ROEC) Calculator
This calculator measures how efficiently a company generates profits from the capital it employs (both equity and debt). ROEC is a key metric for assessing financial performance.
Input Values
Understanding Return on Employed Capital (ROEC)
What is ROEC?
Return on Employed Capital (ROEC) measures how efficiently a company generates profits relative to the total capital it employs (equity + debt - non-operating assets). Unlike ROE (Return on Equity), ROEC accounts for both equity and debt financing.
ROEC Formula
ROEC = (Net Income / Employed Capital) × 100
Where:
- Employed Capital = Total Equity + Interest-Bearing Debt - Non-Operating Assets
- Net Income = Profit after taxes (from income statement)
Why Use ROEC?
- Accounts for both equity and debt, unlike ROE which only considers equity.
- Helps compare companies with different capital structures.
- Identifies efficient use of all invested capital.
Example Calculation
Given:
- Net Income = $500,000
- Total Equity = $2,000,000
- Interest-Bearing Debt = $1,000,000
- Non-Operating Assets = $500,000
Step 1: Employed Capital = $2M + $1M - $0.5M = $2.5M
Step 2: ROEC = ($500K / $2.5M) × 100 = 20%
Real-World ROEC Examples
Example 1: Tech Startup
Scenario: A tech startup with $200K net income, $1M equity, $500K debt, and $100K excess cash.
Calculation:
Employed Capital = $1M + $500K - $100K = $1.4M
ROEC = ($200K / $1.4M) × 100 ≈ 14.29%
Interpretation: The startup generates a 14.3% return on its employed capital.
Example 2: Manufacturing Company
Scenario: A manufacturer with $1.5M net income, $5M equity, $3M debt, and no excess cash.
Calculation:
Employed Capital = $5M + $3M - $0 = $8M
ROEC = ($1.5M / $8M) × 100 = 18.75%
Interpretation: The company earns an 18.8% return on capital employed.
Example 3: Retail Chain
Scenario: A retailer with $800K net income, $4M equity, $2M debt, and $300K investments.
Calculation:
Employed Capital = $4M + $2M - $300K = $5.7M
ROEC = ($800K / $5.7M) × 100 ≈ 14.04%
Interpretation: The retail chain's ROEC of 14% indicates moderate efficiency.
Example 4: Service Business (Low Debt)
Scenario: A service firm with $300K net income, $2M equity, $100K debt, and $50K excess cash.
Calculation:
Employed Capital = $2M + $100K - $50K = $2.05M
ROEC = ($300K / $2.05M) × 100 ≈ 14.63%
Interpretation: The business achieves a 14.6% return despite low debt.
Example 5: High-Growth SaaS Company
Scenario: A SaaS company with negative $100K net income, $3M equity, $1M debt, and $200K cash.
Calculation:
Employed Capital = $3M + $1M - $200K = $3.8M
ROEC = (-$100K / $3.8M) × 100 ≈ -2.63%
Interpretation: Negative ROEC indicates unprofitability (common in early-stage startups).
Example 6: Capital-Intensive Industry
Scenario: An energy company with $10M net income, $50M equity, $30M debt, and $5M non-operating assets.
Calculation:
Employed Capital = $50M + $30M - $5M = $75M
ROEC = ($10M / $75M) × 100 ≈ 13.33%
Interpretation: The 13.3% ROEC reflects capital-intensive operations.
Example 7: Leveraged Buyout
Scenario: A leveraged buyout with $2M net income, $1M equity, $9M debt, and $0 excess cash.
Calculation:
Employed Capital = $1M + $9M - $0 = $10M
ROEC = ($2M / $10M) × 100 = 20%
Interpretation: High ROEC due to heavy debt leverage (higher risk).
Example 8: ROEC vs. ROE Comparison
Scenario: Two companies with $1M net income each:
Company A: $5M equity, $0 debt → ROE = 20%, ROEC = 20%
Company B: $2M equity, $3M debt → ROE = 50%, ROEC = ($1M / $5M) × 100 = 20%
Interpretation: ROEC equalizes comparisons by accounting for debt.
Example 9: Seasonal Business
Scenario: A seasonal business with $400K net income, $1.5M equity, $500K debt, and $100K cash.
Calculation:
Employed Capital = $1.5M + $500K - $100K = $1.9M
ROEC = ($400K / $1.9M) × 100 ≈ 21.05%
Interpretation: Strong ROEC despite seasonality.
Example 10: Declining ROEC
Scenario: A company's ROEC drops from 15% to 8% over 3 years.
Possible Causes:
- Net income decreased while capital remained stable.
- Capital employed increased without profit growth.
- Non-operating assets grew significantly.
Action: Investigate profitability or capital efficiency issues.
Frequently Asked Questions (FAQs)
1. What is the difference between ROEC and ROIC?
ROEC (Return on Employed Capital) uses net income and total capital (equity + debt). ROIC (Return on Invested Capital) uses NOPAT (Net Operating Profit After Tax) and invested capital (debt + equity - non-operating assets). ROIC is often preferred for comparing operational efficiency.
2. How does ROEC differ from ROE?
ROE (Return on Equity) = Net Income / Shareholders' Equity. It ignores debt. ROEC includes debt in the denominator, making it useful for comparing companies with different capital structures.
3. What is a good ROEC value?
Generally:
- >15%: Excellent
- 10-15%: Good
- 5-10%: Average
- <5%: Poor (unless temporary)
Compare to industry averages for context.
4. Why subtract non-operating assets?
Non-operating assets (like excess cash) aren't used to generate core profits. Subtracting them focuses on capital actively employed in operations.
5. Can ROEC be negative?
Yes, if net income is negative (losses). This indicates the company is destroying capital.
6. How to improve ROEC?
- Increase net income (revenue growth or cost control).
- Reduce non-productive capital (sell unused assets).
- Optimize debt/equity mix.
7. Limitations of ROEC?
ROEC doesn't account for:
- Risk (high debt may inflate ROEC but increase risk).
- Asset age (older assets may be understated on balance sheets).
- Short-term fluctuations.
8. Should I use average or year-end capital?
For consistency, use average capital over the period if net income spans multiple years. For single-year analysis, year-end is acceptable.
9. How does ROEC handle leases?
Under IFRS/US GAAP, operating leases are capitalized (added to debt). Include these in interest-bearing debt for accurate ROEC.
10. ROEC vs. ROCE?
ROCE (Return on Capital Employed) uses EBIT instead of net income. ROCE is pre-tax and pre-interest, while ROEC is after-tax and post-interest.
