What is Return on Capital?
Return on capital is the profit earned per dollar of capital tied up, expressed as an annual percentage. At company level it compares operating profit with the debt and equity funding the business. At operator level it compares the profit from a product or purchase order with the cash locked in that stock.
Two close relatives use stricter definitions. Return on invested capital uses after-tax operating profit over debt plus equity. Return on capital employed (ROCE) uses operating profit over total assets minus current liabilities.
Return on capital is different from return of capital. Return of capital is getting your original money back; return on capital is the profit on top of it.
Formula
Return on capital = operating profit after tax ÷ (debt + equity)
Per order: (contribution profit ÷ cash tied up) × (365 ÷ days tied up)
Example
Illustrative: a $40,000 purchase order earns $12,000 of contribution profit and the cash comes back in 90 days.
- Return per cycle: $12,000 ÷ $40,000 = 30%
- Cycles per year: 365 ÷ 90 = about 4
- Annual return on capital: about 122%
If the same order takes 180 days, the annual return falls to about 61%.
Why Return on Capital Matters for Operators
Margin alone does not show whether an order is worth funding. Return on capital adds the cash and the time, so inventory turnover and payout timing count as much as price. The rule: fund an order only when its return on capital is above your cost of capital.
Full guide → Return on Capital for Ecommerce: Is This Purchase Order Worth Funding?
FAQ
How do you calculate return on capital?
Divide profit by the capital tied up, then annualize. For a company, use operating profit after tax over debt plus equity. For an order, divide contribution profit by the cash in the order and multiply by 365 divided by the days the cash is tied up.
What is a good return on capital?
A good return on capital is one that sits clearly above your cost of capital. The level that clears it depends on how the business is funded, how capital-intensive it is and how fast stock turns, so a single benchmark across companies is misleading.