How to use ROCE to check if you should invest

Julie Brownlee, Fsp Invest, 19 Jan. 2015

Tags: roce, return on capital employed, how to use roce, what is roce, investing, finding good stocks to invest in

When it comes to deciding whether or not to invest in a particular stock, it can be a difficult task. How do you know you’re making the right decision?

If you’re looking for confirmation about whether you should invest in a stock or not, check out its ROCE.

So what is ROCE? And how can you use ROCE to make a good investment?

Read on to find out…

What is ROCE?

ROCE stands for return on capital employed.

ROCE looks at a company’s trading profit as a percentage of the money or assets invested in the business.

This measure may not be as widely used or well known as the price earnings ratio, but it’s worth looking at before investing. It can reveal a lot about a business.

To calculate ROCE, you need to add together a company’s equity and borrowings to give you the money invested in a business. You then use this as a percentage to give you an interest rate.

This makes it easy to use. Generally speaking, the higher the ROCE, the better.

ROCE reveals how good a company’s management is at investing the money it’s raised through borrowing as well as through its shareholders.

Why you should use ROCE

ROCE can be a much better alternative to looking at a company’s profits and ratios using these figures. This is because profits can give the impression of things being better than they actually are within a company.

For instance, a company can buy other businesses or make other investments to boost profits. But these choices may not necessarily be good uses of the company’s money. And they may not deliver decent returns over time.

How to use ROCE to see how hard a company’s money is working

If you want to use ROCE to look at how a company’s performing, work it out for the past five years at a minimum. This will give you a chance to see if a trend is emerging.

If a company is worthy of your investment, you want to see ROCE at high, stable levels over the period.

But if your calculations show that ROCE is low, it can signal that this company may not be the best home for your cash.

So there you have it. How to use ROCE to check if you should invest.

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