How we work out return on capital
See’s Candies, 2007
$82 millionpre-tax profit
$40 millioncapital needed to run it
205%return on capital
Operating profit (EBIT) ÷ (net working capital + net fixed assets), with excess cash taken out first
Why it matters
It shows what each dollar tied up in the business earns. Idle cash doesn’t run the business, so counting it makes a cash-rich company look worse than it is. See’s needed so little capital that, of $1.35 billion earned before tax from 1972 to 2007, all but $32 million went to Berkshire to invest elsewhere.