Below 10%: weak
Capital isn't earning much above its cost. Common in capital-intensive or commoditized businesses.
Definition
What is ROCE (return on capital employed)?
Return on capital employed (ROCE) is operating profit (EBIT) divided by capital employed, total assets minus current liabilities. It measures how efficiently a company generates operating profit from the long-term capital at its disposal. Because it's measured pre-tax and pre-financing, it's a clean, comparable read on operating quality, and it's the headline metric of Terry Smith's Fundsmith approach.
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Short answer
ROCE is close kin to ROIC - both ask "what return does the capital earn?" As with ROIC, the test is whether it beats the cost of capital. Terry Smith built Fundsmith on owning businesses with consistently high ROCE, funded by retained earnings rather than debt.
How to read ROCE
10-15%: decent
Clears a typical cost of capital with some room to spare.
15-20%: strong
High-quality operations: the Fundsmith-style hunting ground for durable compounders.
Above 20% (sustained): excellent
Capital-light compounders with durable advantages. Rare, and the market usually knows.
A worked example
A company with $800M of EBIT on $4B of capital employed earns a 20 percent ROCE. Sustained over a decade, that's the signature of a high-quality compounder.
What makes it powerful is reinvestment: a business earning 20 percent on capital that can redeploy retained earnings at similar rates compounds intrinsic value far faster than a low-ROCE peer, which is precisely the Terry Smith thesis: buy good companies (high ROCE), don't overpay, and do nothing.
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Related
- What is ROIC? - ROCE's close cousin; both judge returns against the cost of capital.
- What is the Smith-Fit Score? - the Fundsmith framework built on high, durable ROCE.
- What is an economic moat? - the durable advantage that lets a business sustain high ROCE for years.
- Top Smith-fit stocks today - the live ranking of high-ROCE, low-capital-intensity compounders.
See ROCE on a real verdict
invest-like surfaces ROCE and its consistency inside the Smith fit-score, so you can spot durable compounders the way Fundsmith does.
Educational only. invest-like is not a registered investment adviser; nothing here is personalised investment advice. Always do your own research and consider your individual circumstances.