ROCE : what’s that got to do with project, programme or portfolio management ?

In this blog, Jon explores the use of Return on Capital Employed (ROCE) as a measure of success for your project, programme or portfolio. And argues that it should be used much much more if the world of project management wants to be taken seriously by the higher levels of business management.

An investor's perspective

For the last couple of years, I have been investing my own money directly in companies as opposed to through funds and have read a mass of literature to make myself an intelligent investor rather than someone just taking a punt on share … and I’m still learning. To simplify massively, there are two main components to being a successful long term investor :

  1. Buying shares in good to great companies that will continue to grow over time.
  2. Buying shares at a discount to their fair value i.e. picking them up at a bargain.

Some people focus more on the first (growth investing), some more on the second (value investing), but most of the consistently outstanding long term investors, such as Warren Buffet,  seem to combine the two.

Now there is a multitude of ways in which you can evaluate a company’s ability to grow and none are fool proof, but perhaps the number one lead ratio is Return on Capital Employed (ROCE). If you are from across the Atlantic, Return on Invested Capital (ROIC) seems to be the equivalent ratio.

What is ROCE ?

To give you the full definition of Return on Capital Employed :

Return on Capital Employed = (Profit before interest & tax / net capital employed) x 100

where Net Capital Employed = the total amount of capital the company has available coming from shareholders, profits, revaluations, long term borrowings etc..

Or in plain English, ROCE is the measure of ‘the annual bang for your buck for every buck invested’ whether the buck comes out of your own pocket, from profits or is loaned or granted to you.

To quote one author “ROCE is widely seen as an overall efficiency and profitability measure” and is “the nearest we get to a ratio which measures the merits of a company in a single figure” [1].

To illustrate this :

  1. one highly respected investment manager and part-time academic [2], using historical figures from a huge database, demonstrated that if you just pick companies with a high ROCE (indicating that they are a good to great company) with a low Price / Earnings ratio (the most commonly used ratio to determine if something is under or over priced) and ignore ALL other ratios and numbers, you will significantly outperform the market.
  2. Terry Smith, another highly rated investment manager defines a good company as one with a high ROCE and was, for a number of years, steering people away from Tesco’s on the basis that while earnings were steadily increasing, ROCE was steadily decreasing until it became negative i.e. Tesco was progressively making less and less money on each pound invested. Click here for the video [3].

So what has ROCE got to do with project, programme or portfolio management ?

Projects normally involve investing money. At a project level, they are initially judged a financial success if they come in within budget. However, post Completion :

  • A project is only worthwhile doing if it produces benefits. If you can assign a monetary figure to these benefits and potential dis-benefits, then you can select projects which offer the highest return. And if a tangible output or outcome measure – whether social, environmental or economic - equates to a tangible monetary figure, then you can measure the actual ROCE of your project.
  • A Programme is a series of projects which are arranged to deliver meet a distant goal, which being distant, might well change. Some projects out of necessity have to come before others. But if you can alter the sequence of your projects to get earlier payback &/or have the high returning ones delivered earlier, then your ROCE will increase to your organisation's benefit.
  • A Portfolio is a grouping of an organisation’s projects and programmes with ‘portfolio management’ being ‘the selection, prioritisation and control of an organisation’s projects and programmes in line with its strategic objectives and capacity to deliver’ [4]. So selecting projects capable of delivering a high ROCE should be strong focus of any portfolio manager.

Putting ROCE, projects and organisational success together.

So put simply :

  • if you are in the public sector, you should be aiming to select and deliver* projects which deliver high annual social, economic & environmental returns in order to deliver the best returns for the tax payer;whilst
  • if you are in business, if you can consistently select and deliver* projects - whether delivered for external parties for profit or internal imporvement projects - with a high ROCE, then your business will either grow phenomenally and / or deliver high amounts of cash back to your shareholders.

Indeed, Warren Buffet, the world's most successful investor, says something along the lines that senior managements most important job, whether they realise it or not, is capital allocation. 

So if the measure of success, at business level, for capital allocation is ROCE and that's also “the nearest we get to a ratio which measures the merits of a company in a single figure”, then shouldn’t it also be THE key measure to use when it comes to selecting projects to do and judging their success ?

Well, it's in your hands now ...

* Note the word ‘deliver’ in both these bullets because a marvelous potential project delivered late and over-budget will not have as high a ROCE as the same project delivered under-budget and ahead of schedule.


[1] Leach R (2010), Ratios made simple : A beginner's guide to key financial ratios, Harriman House Ltd ISBN 978-0-85719-082-6

[2] Greenblatt J (2010), The Little Book that still Beats the Market, John Wiley & Sons. ISBN 978-0-47092-671-0

[3] Oxlade A (14th October 2014), video interview titled 'Terry Smith: How to avoid dud shares and why the demise of Tesco shares was so obvious', on Daily Telegraph website here

[4] Association for Project Management (2012), Body of Knowledge, 6th edition. ISBN 978-1-903494-42-4