Common sense tells us that ROCE should be higher than the cost incurred by the company to get the capital. The two sources of capital, equity and debt, have different costs; equity is more expensive than debt. Their costs are different for different companies.
This is represented by the Weighted Average Cost of Capital, WACC (pronounced wack). Simply put, a large, consistently profitable company has a lower WACC than a small company with an inconsistent track record.
The difference, ROCE minus WACC, tells you if the company is indeed generating a positive excess return over its cost of capital. So 15% ROCE is good if WACC is 13%. But it’s bad if WACC is 16%. See our blog post on the Wealth Creation Index to understand why this is something every savvy investor should understand.