What is ROCE? Understanding Return on Capital Employed in 2025

In the ever-evolving world of Australian finance, investors and business owners are constantly seeking smarter ways to evaluate performance. One metric that continues to stand out in 2025 is Return on Capital Employed (ROCE). Whether you’re eyeing ASX-listed companies, analysing your own business, or comparing opportunities, understanding ROCE could be the difference between an average and a standout investment strategy.

What is ROCE and Why Does It Matter?

ROCE measures how efficiently a company generates profits from its capital. It’s calculated as:

• ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed

Capital employed typically means total assets minus current liabilities. The higher the ROCE, the better a company is at turning its capital into profits.

For Australians navigating a high-interest rate environment and changing tax policies in 2025, ROCE is even more relevant. It reveals which companies are best at weathering economic uncertainty and making the most of every dollar invested.

2025: Why ROCE is Under the Spotlight

This year, several trends are putting ROCE in focus:

• Rising Cost of Capital: The RBA’s rate hikes have pushed borrowing costs higher. Companies that maintain a strong ROCE are proving more resilient as they’re less reliant on cheap debt.
• Tax Reform: The 2025 federal budget introduced new depreciation rules for small businesses and incentives for green investments. These changes impact how assets (and thus capital employed) are calculated, making it vital to track ROCE shifts over time.
• Investor Scrutiny: Institutional investors and super funds are increasingly using ROCE alongside traditional metrics like return on equity (ROE) to assess management performance and capital allocation.

ROCE in Action: Real-World Australian Examples

Let’s bring this metric to life with a few local cases:

• Woolworths Group: In its latest 2025 half-year report, Woolworths posted a ROCE of 15.2%, up from 13.9% in 2024. This improvement reflects disciplined capital spending and strong earnings from its core supermarket business.
• Fortescue Metals: With commodity prices fluctuating, Fortescue’s 2025 ROCE dropped to 9.8%. Analysts flagged increased capital employed due to heavy investment in hydrogen projects, even as EBIT softened.
• Small Business Perspective: For an SME investing in solar panels under the new Instant Asset Write-Off scheme, calculating ROCE post-upgrade can reveal whether the investment is delivering meaningful returns compared to alternative uses for that capital.

In each case, ROCE gives investors and business owners a clearer picture of how effectively management is deploying resources—especially as economic conditions shift.

Using ROCE to Make Smarter Decisions

Here’s how Australians can put ROCE to practical use in 2025:

• Compare Companies: Use ROCE to benchmark businesses within the same sector. For example, banks or retailers with a higher ROCE are generally making smarter capital decisions.
• Spot Capital Traps: A declining ROCE over several years can signal inefficiency, overexpansion, or poor acquisitions. Watch for these red flags in annual reports.
• Balance Sheet Health: ROCE works best alongside other indicators like debt-to-equity and free cash flow. Together, they paint a fuller picture of financial health and future growth potential.

With Australian companies required to disclose more granular capital allocation data in 2025 (thanks to updated ASIC reporting standards), it’s never been easier to track and compare ROCE figures.

The Bottom Line: ROCE as a 2025 Essential

ROCE isn’t just a number; it’s a window into how well a company puts your money to work. In 2025’s challenging financial landscape, it deserves a place at the top of every investor’s toolkit. Whether you’re a retail investor, business owner, or super fund trustee, keeping an eye on ROCE can help you make sharper, more informed decisions in the months ahead.