Definition
Return on Capital (ROC) is calculated as follows:
Return on Capital (ROC) = (EBIT - Adjusted Taxes) / (Book Value of Debt + Book Value of Equity - Cash)
Formula
Return on Capital (ROC) = (EBIT - Adjusted Taxes) / (Book Value of Debt + Book Value of Equity - Cash)
Douglas Dynamics, Inc. ROC Calculation
* All numbers are in millions except for per share dataDouglas Dynamics, Inc. Annual Data
| Dec07 | Dec08 | Dec09 | Dec10 | Dec11 | Dec12 |
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| ROC |  | | | | | |
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Douglas Dynamics, Inc. Quarterly Data
| Dec10 | Mar11 | Jun11 | Sep11 | Dec11 | Mar12 | Jun12 | Sep12 | Dec12 | Mar13 |
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| ROC | | | | | | | | | | |
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Explanation
Return on Capital measures how well a company generates cash flow relative to the capital it has invested in its business. The reason book values of debt and equity are used is because the book values are the capital the company received when issuing the debt or receiving the equity investments.
There are four key components to this definition. The first is the use of operating income rather than net income in the numerator. The second is the tax adjustment to this operating income, computed as a hypothetical tax based on an effective or marginal tax rate. The third is the use of book values for invested capital, rather than market values. The final is the timing difference; the capital invested is from the end of the prior year whereas the operating income is the current years number.
Why is Return on Capital important?
Because it costs money to raise capital. A firm that generates higher returns on investment than it costs the company to raise the capital needed for that investment is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases, whereas a firm that earns returns that do not match up to its cost of capital will destroy value as it grows.
Beaware
Like ROE and ROA, ROC is calculated with only 12 months of data. Fluctuations in the companys earnings or business cycles can affect the ratio drastically. It is important to look at the ratio from a long term perspective.
Related Terms
Return on Assets,
Return on Equity* All numbers are in millions except for per share dataDouglas Dynamics, Inc. Annual Data
| Dec07 | Dec08 | Dec09 | Dec10 | Dec11 | Dec12 |
|---|
| ROC | | | | | | |
|---|
Douglas Dynamics, Inc. Quarterly Data
| Dec10 | Mar11 | Jun11 | Sep11 | Dec11 | Mar12 | Jun12 | Sep12 | Dec12 | Mar13 |
|---|
| ROC | | | | | | | | | | |
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