Difference Between ROIC and ROCE: A Quick Guide

ROCE (Return on Capital Employed) and ROIC (Return on Invested Capital) are financial ratios that investors can use to understand how a company is using its capital to generate profits. ROIC and ROCE are calculated differently, so they can give investors different views of a company’s performance.

This article explains the key differences between ROIC and ROCE.

Key Takeaways

• ROIC and ROCE both measure capital efficiency, but they use different formulas and definitions.
• ROIC measures after-tax operating returns on capital tied up directly in business operations, using Net Operating Profit After Tax (NOPAT) and Invested Capital.
• ROCE measures pre-tax operating returns using Earnings Before Interest and Tax (EBIT) relative to Capital Employed, providing a standard view of overall capital efficiency.
• While higher ratios are generally preferred, metrics must be evaluated against cost of capital, asset age, industry peers, and historical trends to confirm value creation.
• Using ROIC and ROCE together offers a well-rounded picture of operating performance, tax efficiency, and capital allocation.

What is ROIC?

ROIC means Return on Invested Capital. This ratio determines the efficiency of the usage of capital invested in the business by a company to earn operating income.

In layman's terms, ROIC is the measure of how much profit a company earns from one unit of capital invested in the business.

The formula for calculating ROIC is given below:

ROIC = NOPAT ÷ Invested Capital × 100

NOPAT (Net Operating Profit After Tax): NOPAT measures core operating profitability after deducting tax, but before financing costs. It is generally calculated as:

NOPAT = EBIT × (1 – Applicable Tax Rate)

Unlike reported Profit After Tax (PAT), NOPAT is based on operating profit (EBIT excluding non-operating income and expenses) and leaves out interest expense. This shows the profit from core operations without the effect of how the business is financed.

Invested Capital: Invested Capital represents the net capital actively tied up in operations. Depending on an analyst’s methodology, it is commonly estimated as:

• Operating Assets - Operating Liabilities (Net Operating Assets), or
• Total Debt + Total Equity - Excess Cash and Non-Operating Assets

ROIC Calculation Example

Consider a company with an EBIT of ₹20 crore, an applicable tax rate of 25%, and Invested Capital of ₹100 crore:

NOPAT = ₹20 crore × (1 – 0.25) = ₹15 crore

ROIC = (₹15 crore ÷ ₹100 crore) × 100 = 15%

This indicates that the business generates ₹15 of after-tax operating profit for every ₹100 of capital invested in its core operations.

What is ROCE?

ROCE stands for Return on Capital Employed. It is similar to ROIC and is used to assess how effectively a firm's capital generates operating income.

ROCE = EBIT ÷ Capital Employed × 100

• EBIT (Earnings Before Interest and Tax): Represents operating profit before deducting interest expenses and income taxes.
• Capital Employed: Capital Employed represents the long-term capital base used to fund operations.

Capital Employed is commonly calculated as Total Assets – Current Liabilities. Some analysts instead use Shareholders’ Equity + Long-Term Debt. The two can differ because of provisions, leases, and other balance-sheet items, so the same method has to be used consistently when comparing companies.

Another way of looking at it is that capital employed represents the long-term capital being used by the company to operate its business.

For example, in the case of a business with EBIT of ₹20 crore and capital employed of ₹100 crore, the ROCE is:

ROCE = ₹20 crore ÷ ₹100 crore × 100 = 20%

This business is earning ₹20 in operating profit on every ₹100 invested in the form of capital employed.

Difference Between ROIC and ROCE

Basis	ROIC (Return on Invested Capital)	ROCE (Return on Capital Employed)
Meaning	Measures after-tax operating returns generated from capital tied up in operations.	Measures pre-tax operating returns earned on total capital employed.
Profit Metric	Uses NOPAT, which is operating profit after tax and before interest and other financing costs.	Uses EBIT, evaluating profits before tax and interest expenses.
Capital Base	Focuses on Invested Capital (Net Operating Assets), stripping out excess cash and non-operating assets.	Uses Capital Employed (Total Assets - Current Liabilities or Equity + Long-Term Debt).
Tax Impact	Incorporates operating tax effects.	Excludes tax effects entirely.
Primary Utility	Useful for judging how well the core operating business uses its capital, especially when companies hold very different amounts of cash. Because it is after-tax, differences in tax rates will show up in the result.	Useful for judging how efficiently total long-term capital is used, before the effect of tax.
Industry Comparison	Best compared across peers in the same industry. It can also be compared with the company’s cost of capital (WACC).	Widely used in capital-intensive sectors (e.g., manufacturing, infrastructure). Best compared across peers in the same industry using the same capital employed method.