Do Telcos Reap the Best Returns on Invested Capital?

By some measures, the connectivity business is neither the “worst” nor the “best” industry where it comes to revenue growth or profitability. But connectivity is among the “best” industries where it comes to the effective use of capital, using either the return on capital employed (ROCE) or return on invested capital (ROIC) methods. 

Industry	Average ROCE
Telecommunications	15%
Energy	12%
Financials	11%
Healthcare	10%
Technology	9%
Consumer Discretionary	8%
Consumer Staples	7%
Industrials	6%
Materials	5%
Utilities	4%

Industry	Average ROIC
Telecommunications (Mobile)	17%
Telecommunications (Fixed)	13%
Energy	12%
Financials	11%
Healthcare	10%
Technology	9%
Consumer Discretionary	8%
Consumer Staples	7%
Industrials	6%
Materials	5%
Utilities	4%

ROCE is calculated by dividing earnings before interest and taxes (EBIT) by capital employed. Capital employed is the total assets of a company minus its liabilities. This means that ROCE measures how effectively a company is using all of its assets, including its debt, to generate profits.

ROIC is calculated by dividing net operating profit after taxes (NOPAT) by invested capital. Invested capital is the total amount of money that a company has invested in its business, including equity, debt, and other liabilities. This means that ROIC measures how effectively a company is using its equity and debt to generate profits.

Here is a table summarizing the key differences between ROCE and ROIC:

Characteristic	ROCE	ROIC
Formula	EBIT / Capital employed	NOPAT / Invested capital
Denominator	Total assets - liabilities	Equity + debt + other liabilities
Perspective	Company's perspective	Investor's perspective
Ease of use	Easier to calculate	More difficult to calculate
Relevance	More relevant for comparing companies in different industries	More relevant for comparing companies in the same industry

In general, a higher ROCE or ROIC is better. This means that a company is using its capital more effectively to generate profits. However, it is important to consider the industry that a company is in when interpreting these ratios. For example, a company in a capital-intensive industry, such as manufacturing, may have a lower ROCE or ROIC than a company in a less capital-intensive industry, such as software.

ROCE is based on pre-tax figures, while ROIC is based on after-tax figures. This means that ROCE may be more volatile than ROIC, as it can be affected by changes in tax rates.