Return on Capital Employed

ROCE is the cleanest measure of business quality because it puts a pre-financing profit over all the capital that funds the business, so it cannot be inflated by borrowing the way ROE can. Comparing it with the weighted average cost of capital gives the single most important test in fundamental analysis: capital employed at a return below its cost destroys value, however large the reported profit. The measure is distorted by large cash balances, which sit in capital employed while producing no operating profit, and by capital work in progress that is not yet earning. A company with high ROE and low ROCE is telling you that leverage, not the business, is doing the work.