Biological Diversity Ecosystem Condition and Productivity Soil and Water Role in Global Ecological Cycles Economic and Social Benefits Society's Responsibility
Economic and Social Benefits Distribution of Benefits Sustainability of Benefits
Indicator 5.3.1 - Annual harvest of timber relative to the level of harvest deemed to be sustainable Indicator 5.3.2 - Annual harvest of nontimber forest products relative to the level of harvest deemed to be sustainable Indicator 5.3.3 - Return on capital employed Indicator 5.3.4 - Productivity index Indicator 5.3.5 - Direct, indirect, and induced employment Indicator 5.3.6 - Average income in major employment categories
Indicator 5.3.3 - Return on capital employed
core indicator


Return on capital employed (ROCE) is a key measure of an industry's financial health and performance. It is a ratio that indicates the efficiency and profitability of a company's, or an industry's, capital investments. ROCE is calculated as the earnings before interest and taxes (EBIT) divided by the difference between total assets and current liabilities. Since EBIT is basically revenue minus expenses (excluding interest payments and tax payments), ROCE is therefore essentially the ratio of net revenues to net assets.

In a highly competitive and capital-intensive industry, such as the major segments of the forest products industries, ROCE is a better barometer of financial performance than earnings. In a viable business environment, ROCE should always be higher than the rate at which a business enterprise borrows or any increase in borrowing will reduce shareholders' earnings. The importance of ROCE as a yardstick of the financial viability of an industry also stems from the fact that it is harder to attract private investment into an industry with low returns on capital.

The ROCE in wood and paper manufacturing showed a cyclical pattern from 1988 to 2004 (Figure 5.3b). Between 1988 and 1998, it varied considerably around the average ROCE for all industries. However, it has closely tracked the ROCE for all industries, averaging around 6.62% from 1998 to 2004.

Figure 5.3b

Figure 5.3b Annual average (1988-2004) of return on capital investment (%) in wood and paper manufacturing. (Source: Statistics Canada 2005a)
Updated Data: PDF | Excel


Examining the data for the various subsectors of the forest industry in greater detail,4 clearly there has been a highly cyclical ROCE in the lumber and logging industries (Figure 5.3c). After posting a somewhat lagged rebound in the postrecession period of 1998-99, it slipped again in 2000-2001. Return on capital employed has slipped for the panels industry as well since the early 1990s when it had the highest annual ROCE among the subsectors. It rebounded briefly in 1998-99 but like the lumber and logging industries, it slipped again in the following years. In 2002, the most recent year for which data are available, ROCE for the panels industry was comparable to the average ROCE for the entire sector. However, lumber and panels generally seem to have fared better than pulp and paper in terms of ROCE, partly due to the higher capital intensity of the pulp and paper sector. Certainly in the last couple of years, the ongoing lack of capital investment coupled with low pulp and paper prices has led to poor returns, and even some mill closures. Lumber and panel producers have benefited from stronger prices and more investment into capital, with consequent better returns over the past few years.

Figure 5.3c

Figure 5.3c Subsectoral comparison of the return on capital investment (%). WP=wood pulp; NP&UMPP=newsprint and uncoated mechanical printing paper; OP&B=other papers and boards; LL= lumber and logging; Pnl=panels. (Source: FPAC 2003)

It is important to compare the financial performance of Canada's forest companies with those of the other forestry nations to help assess how well Canada can compete for capital investments. According to the most recently available global survey information (Pricewaterhouse Coopers 2004) on ROCE performance of the top 100 forest companies in the world in 2003, only 17% reached the industry benchmark of 10% or greater, while 69% reported an ROCE of less than 7%. Overall, the top 100 forest companies averaged an ROCE of 4.2%.

Using Canada as a benchmark, with an index value of 1.0, a comparison of ROCE performance between Canada, the United States, Sweden, and Finland placed Sweden in the lead in 2003, followed by the United States. Canada and Finland performed at a similar level (Figure 5.3d).

Figure 5.3d

Figure 5.3d International comparisons (Canada=1.00) of the return on capital investment performance. (Source: Pricewaterhouse Coopers 2004)5

Internationally, however, Canadian companies still face challenges in attracting investments away from their international competitors that have consistently higher ROCE. The forest sector, particularly pulp and paper, is generally a high capital cost industry and Canada's poor ROCE record, compared with its international competitors, makes it difficult to attract investments. This negatively affects the Canadian forest industry and the economic benefits it provides to Canadians.

4 ROCE data, broken down by individual forest subsectors, other than the combined category of wood and paper, is not available from Statistics Canada. The following data source is used: Forest Products Association of Canada (FPAC 2003)-a Pricewaterhouse Coopers study,The Forest Industry in Canada 2002 and earlier issues. These data should be interpreted cautiously as there are differences in the methodology of data collection and the degree of industry coverage between these two data sources.

5 This data source is different from the one used in Figure 5.3c in that the survey examines only the world's 100 largest forest and paper products companies on the basis of their sales rank.