The Return on Capital Employed (ROCE) compares earnings with capital invested in the company, less debt.
To explain further why the ROCE ratio can be a useful tool, consider you have £100K to invest in a bank. One of your main concerns, assuming solvency, would be the return or interest you would receive. In simple terms this is what you should look for in a business. Companies with consistently high returns on capital employed, create shareholder value for the longterm. As long as you intend holding such a company for a long time, it could be argued, you need not focus on too much else.
A high, double digit ROCE figure can often mean the company has a defensible edge against its competitors. Often this is a strong brand or unique product and what Warren Buffet refers to as a ‘moat’ around the business.
There are some problems with the basic formula as it will include intangible assets and depreciation. But some basic understanding of company accounts will allow you to strip out these distortions.