What does the return on capital employed (ROCE) measure?

The return on capital employed (ROCE) measures the efficiency with which a company generates profit from its capital employed, which includes both equity and debt. This metric helps investors and management evaluate how effectively the company is utilizing its resources to produce earnings before interest and tax (EBIT). A higher ROCE indicates a more efficient use of capital, suggesting that the company is generating more profit per unit of capital invested.

This emphasis on the relationship between profit and the total capital employed makes it distinct from other financial ratios. While measuring profitability is intrinsic to ROCE, it specifically highlights the role of capital in the process, making it a valuable tool for understanding overall business performance and operational efficiency.

The other options, such as assessing the quality of capital investments or focusing solely on operational revenue, do not encapsulate the comprehensive nature of ROCE, as they either narrow the scope or misalign with the core concept of capital efficiency in generating profits.