Return on Capital Employed measures operating profit against the capital tied up in the business, so you improve it either by raising profit from the same capital or by producing the same profit from less capital. Most practical improvements come from pricing, cost control, asset utilisation and releasing cash trapped in stock or debtors.
On the profit side, look at gross margin before you look at overheads: small pricing corrections, supplier renegotiation and dropping loss-making lines usually move the number faster than trimming administrative costs. On the capital side, examine whether every asset on your balance sheet is actually earning. Idle machinery, over-stocked inventory and slow-paying customers all inflate capital employed without adding operating profit.
Be careful comparing your figure to a published benchmark. ROCE is heavily influenced by how capital-intensive your sector is and by whether you own assets outright or finance them, so a haulage firm, a manufacturer and a consultancy are not measuring the same thing. A falling or rising trend in your own business over several years is usually more informative than a cross-sector comparison.
Financing choices affect the ratio too. Buying an asset outright puts the full cost into capital employed straight away, whereas spreading the cost through hire purchase or leasing changes the timing and the balance sheet treatment. The right answer depends on your tax position, cash flow and accounting policy — this is general information, not accounting advice, so confirm the treatment with your accountant before making a decision on that basis.
CW Asset Finance is an independent credit broker based in Tadcaster, North Yorkshire, with access to a panel of 60+ lenders. If you are weighing up how to fund equipment without tying up working capital, we can talk you through the options available to your business.