What does Return on Capital Employed (ROCE) indicate?

• A. It is a liquidity measure
• B. It directly determines dividend payout
• C. It measures how well a business uses its capital to generate profits
• D. It equals net profit

Answer: (C)

ROCE shows how efficiently a business uses its capital to generate profits. It compares operating profit to the capital employed (the funds invested in the business, typically equity plus long‑term debt, or total assets minus current liabilities). A higher ROCE means more operating profit is produced per unit of capital, indicating more effective use of the capital base. This isn’t about short‑term cash or liquidity, so it doesn’t measure how easily the business can meet immediate obligations. It also doesn’t directly decide dividend payouts, which depend on policy, cash flow, and reserves, nor is ROCE equal to net profit—it's a ratio that links profitability to the capital invested.