Return on Capital (ROC)


Return On Capital (ROC) measures a company's efficiency at allocating the capital under its control to profitable investments. The ROC measure gives a sense of how well a company is using its money to generate returns. Comparing a company's ROC with its cost of capital (WACC) reveals whether invested capital was used effectively.

We calculate the ROC as defined in Joel Greenblatt's little book that beats the market. Instead of comparing EBIT to total assets, we compare it to the cost of the assets used to produce those earnings (tangible capital employed).

Formula:

ROC = Operating Income ( Net Fixed Assets + Net Working Capital )

Click on the links below to navigate to the components of this formula:

  • Operating Income, i.e. EBIT.
  • Net Working Capital: the capital a business needs to fund its receivables and inventory.
  • Net Fixed Assets: the capital needed to fund the purchase of fixed assets necessary to conduct its business.