Return on incremental capital
Also called: incremental ROCE, incremental return on capital, return on new capital
The extra operating profit a company earns divided by the extra capital it invested to earn it.
Growth creates value only when the return on new capital is above the cost of capital. A company with a high average ROCE can earn much lower returns on new projects, so this measure shows whether growth is the valuable kind. Measure it over several years.
Example
An extra ₹60 crore of operating profit from ₹1,000 crore of new capital is a 6% incremental return.
Learn more in these lessons
- Returns on incremental capitalWhen does a company's growth create value for shareholders?
- Capital allocationHow do you judge what management does with a company's cash?
Related terms
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