Return on capital employed, pre-tax (ROCE (pre-tax))
Operating profit, before tax, as a percentage of total assets less the liabilities due within a year.
It is the pre-tax view of the same question, and the measure most European reporting uses. It reproduces exactly from the filed statements, which the after-tax figure above does not always do.
How it is computed here
Operating income / (total assets - current liabilities) x 100
Measured over the latest complete fiscal year, as filed. Filed under quality. Higher is the stronger reading, other things equal.
The readings, and where the lines come from
| Range | Reading |
|---|---|
| below 10.0% | Likely below the cost of capital |
| 10.0% to 15.0% | Around the cost of capital |
| 15.0% to 25.0% | Above the cost of capital |
| 25.0% and above | Exceptional |
A practitioners’ convention, not an estimated boundary. Anchored on the cost of capital: Damodaran's annual global cost-of-capital dataset puts the mature-market median near 8 percent.
When it misleads
- Pre-tax, so it sits above the after-tax figure by roughly the tax rate. Do not compare the two directly.
- This one is always our own recompute from the filed statements, so it reproduces: the published formula is the formula used.
- Large cash balances sit in the denominator and depress the figure without the business being any worse.
Not meaningful for banks, insurers: the product prints n/m with the reason rather than a number for them.
Questions
How is return on capital employed, pre-tax calculated?
Operating income / (total assets - current liabilities) x 100. Measured over the latest complete fiscal year, as filed.
What does return on capital employed, pre-tax tell a value investor?
It is the pre-tax view of the same question, and the measure most European reporting uses. It reproduces exactly from the filed statements, which the after-tax figure above does not always do.
When does return on capital employed, pre-tax mislead?
Pre-tax, so it sits above the after-tax figure by roughly the tax rate. Do not compare the two directly. This one is always our own recompute from the filed statements, so it reproduces: the published formula is the formula used. Large cash balances sit in the denominator and depress the figure without the business being any worse.