Expresses the operating profit of the business as a percentage of the capital invested. It is calculated by dividing operating profit (or net profit before interest and tax) into the total capital employed in the business (total equity + non-current liabilities or owners / shareholders’ equity and any long-term loan capital) and multiplying by a hundred. For example, if a company has an operating profit of £220,000 and capital employed of £1.8 million, then the return on capital is 12.2% (220,000 / 1,800,000 x 100). The ratio should be compared with previous years or similar entities / industry norms. The higher the percentage, the better the business performance. This ratio relates profit to the size of the business, thus helping to avoid sweeping judgements being made about a profit of, say, £100 million being high and £1,000 being low (which might be highly acceptable if the capital invested was £4,000). It is one of the most useful inter-firm comparisons of operational efficiency and is sometimes referred to as the ‘primary efficiency’ ratio. This is because it provides a direct measure of the main task of management, ie to maximise the return on capital invested. It is one of the most useful inter-firm comparisons of operational efficiency and is sometimes referred to as the ‘primary efficiency’ ratio. This is because it provides a direct measure of the main task of management, ie to maximise the return on capital invested in a business or a specific business project. Example, a business invests £60,000 in a new machine, which generates a return of £6,000. The return on capital will be 10% (£6,000 / £60,000 x 100). Return on capital can be used to compare the potential profitability of different businesses and / or individual business projects / alternative investments. It is a simple ratio that helps to avoid sweeping judgements being made about a return of, say, £100 million being high and £1,000 being low (which might be highly acceptable if the capital invested was £4,000). It provides the business with a ratio that can help it to decide whether or not it is worth continuing the business and / or investing in a new business project. If a n existing business or specific business project being considered is unable to generate more than the rate of interest, then it the existing business may as well close, sell off its assets, and put the money in a bank and, in the case of a specific business project, an alternative more lucrative investment sought instead.