Return on Risk Adjusted Capital

The return on risk-adjusted capital (RORAC) is a rate of return measure commonly used in financial analysis, where various projects, endeavors, and investments are evaluated based on capital at risk. Projects with different risk profiles are easier to compare with each other once their individual RORAC values have been calculated.

The Formula for RORAC Is

Return on Risk-Adjusted Capital is calculated by dividing a company’s net income by the risk-weighted assets.

Return on Risk Adjusted Capital             =                  Net Income    

                                                                                    Risk-Weighted Assets

Risk-weighted assets  =  Allocated risk capital, economic capital, or value at risk

​Return on risk-adjusted capital (RORAC) takes into account the capital at risk, whether it be related to a project or company division. Allocated risk capital is the firm’s capital, adjusted for a maximum potential loss based on estimated future earnings distributions or the volatility of earnings.