Return on Average Capital Employed (ROACE) is emerging as a must-watch metric for Australian investors, business owners, and finance professionals in 2025. As economic uncertainty and capital efficiency remain front of mind, understanding how to measure and interpret ROACE can offer a competitive edge—whether you’re analysing ASX-listed giants, scaling an SME, or weighing up your next portfolio move.
ROACE measures how effectively a company generates profits from its capital base over a given period. Unlike the more familiar ROCE (Return on Capital Employed), which uses capital at a single point in time, ROACE averages the capital employed at the beginning and end of the period, smoothing out any seasonal or one-off fluctuations.
This approach gives a clearer, more consistent view of how well a business is using its resources to generate returns, which is especially useful in industries with large capital swings—think mining, energy, and manufacturing.
In 2025, Australian businesses are navigating a landscape shaped by higher interest rates, stricter lending standards, and increased pressure from investors for efficient capital allocation. The government’s latest push for productivity—highlighted in the Federal Budget 2025’s focus on innovation and infrastructure—means companies must be laser-focused on getting the most from every dollar invested.
Case Study: ASX Energy Sector
Australia’s energy companies, such as Woodside Energy and Santos, have been under the microscope as capital-intensive projects ramp up. In 2024, Woodside reported a ROACE of around 11%, reflecting both robust earnings from LNG exports and significant capital investments in renewables. Analysts expect this figure to be a key benchmark in 2025 as investors compare efficiency across a sector facing both regulatory change and opportunities from the clean energy transition.
Small Business Perspective
For SMEs, particularly those seeking asset finance or business loans, banks are increasingly scrutinising ROACE as part of lending assessments. Lenders want to see that new capital will be used productively, and a healthy, rising ROACE can help secure better rates or higher credit limits.
Whether you’re investing in shares, managing a business, or working in corporate finance, ROACE offers practical insights:
Pro tip: Always look at ROACE alongside other metrics and consider the industry context. A high ROACE in a capital-light tech company means something different to a similar number in a capital-heavy mining firm.
This year, ASIC and the ASX have updated disclosure guidelines, encouraging more transparent reporting of capital efficiency metrics, including ROACE. Investors can now expect clearer, more standardised data in annual reports. Meanwhile, the ATO’s revised small business depreciation rules may impact capital employed calculations, particularly for SMEs investing in new equipment under the expanded instant asset write-off scheme.
Additionally, superannuation funds are using ROACE as part of their ESG (Environmental, Social, and Governance) analysis, rewarding companies that show not just profits, but prudent and sustainable capital management.
With capital efficiency under the spotlight and financial conditions tight, ROACE is more relevant than ever for Australians looking to boost returns—whether in business or on the ASX. By understanding and applying ROACE, you’ll be better equipped to make informed, confident financial decisions in a rapidly evolving market.