Return on Capital

Overview of Return on Capital
The return on capital is an important concept in the context of economics. In the domain of economics the return on capital is also called the return on invested capital. The return on capital could also be described as a financial tool that is not part of the Generally Accepted Accounting Principles.

Uses of Return on Capital
The return on capital can be used in order to show the capacity of a particular business organization to create cash flow. This performance is normally measured with respect to the capital that has been invested by the particular company itself.

Description of Return on Capital
The return on capital has often been explained as a net operating profit less adjusted taxes that is divided by the capital that has been put in by a particular business organization.

The return on capital is normally provided as a percentage.

Calculation of Return on Capital
While determining the return on capital the factor of capital is inclusive of the total amount of money that has been put in by a company. This means that the various debts incurred by the company in course of its operation and the equity of the shareholders are included in the calculation.
The return on capital is normally determined by dividing the difference of the net operating profit and taxes by the entire capital that has been invested by the company.
Implications of Return on Capital
If the return on capital is more than the cost of capital it means the company is making profits. On the other hand, if the return on capital is lesser than the cost of capital then it means that the company is facing losses.

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Last Updated on : 27th June 2013

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