How to Calculate ROCE, ROI and Gearing

To calculate ROCE, return on investment (ROI) and gearing, divide the relevant profit or borrowing figure by the amount of capital being compared, then multiply by $100$ to express the result as a percentage. The key is choosing the right numerator and denominator for each measure.

ROCE

Return on capital employed (ROCE) measures how effectively a business generates operating profit from the capital invested in it:

$$ROCE=\frac{operating\; profit}{capital\; employed}\times 100$$

Operating profit is profit before interest and tax. Capital employed can be calculated as total assets minus current liabilities, or as equity plus non-current liabilities. ROCE is a whole-business measure: capital employed represents funding tied up in the business, not the cost of one project. Use the operating profit and capital figures relevant to the question.

Return on investment

ROI compares the profit generated by a particular investment with its cost:

$$ROI=\frac{profit\; from\; the\; investment}{cost\; of\; the\; investment}\times 100$$

Use the profit for the period specified in the question. For example, if the question gives annual profit, the result is an annual ROI.

Gearing

Gearing shows the proportion of a business’s capital employed that comes from long-term borrowing:

$$Gearing=\frac{non-current\; liabilities}{capital\; employed}\times 100$$

Non-current liabilities are amounts owed beyond the short term, such as long-term loans. Higher gearing generally means greater reliance on borrowing, which can increase financial risk because interest and repayments still need to be paid.

Worked example

Suppose a business has operating profit of £40,000\pounds 40{,}000£40,000, capital employed of £200,000\pounds 200{,}000£200,000 and non-current liabilities of £60,000\pounds 60{,}000£60,000. A separate project costs £30,000\pounds 30{,}000£30,000 and generates annual profit of £6,000\pounds 6{,}000£6,000.

• ROCE: $\frac{40,000}{200,000}\times 100=20\%$.
• Annual ROI: $\frac{6,000}{30,000}\times 100=20\%$.
• Gearing: $\frac{60,000}{200,000}\times 100=30\%$.

Although the returns are both $20\%$, they compare different profits and capital amounts. Gearing is not a return: it describes how the business is financed, so a higher percentage does not automatically mean a higher profit.

Common exam mistake: ROCE and ROI happen to match here, but they measure different things. ROCE uses the business’s capital employed; ROI uses the cost of the specific investment.