ROE vs. ROCE: Detailed Analysis of Return on Equity and Return on Capital Employed
ROCE and ROE
When evaluating a company's financial performance, two important metrics to consider are Return on Capital Employed (ROCE) and Return on Equity (ROE). Both of these ratios help investors understand how efficiently a company is using its resources to generate profits, but they focus on different aspects of the company's finances.
Finding multibagger stocks is important for building wealth. Discover potential multibaggers at Sovrenn Discovery
Return on Capital Employed (ROCE)
ROCE measures a company's profitability and the efficiency with which its capital is employed. It is a useful indicator for assessing how well a company is generating profits from its total capital, which includes both equity and debt.
Characteristics of ROCE:
- Measures profitability relative to total capital.
- Includes both equity and debt in its calculation.
- Useful for comparing companies with different capital structures.
Investing has built huge wealth for several HNI investors. Learn investing FREE OF CHARGE at Sovrenn Education
ROCE Formula:
- ROCE= EBIT/ Total Capital Employed
- EBIT= Earning Before Interest and taxes
- Total Capital Employed = Total Assets – Current Liablities
Return on Equity (ROE)
ROE measures a company's profitability relative to shareholders' equity. It indicates how effectively the company is using the money invested by its shareholders to generate profits.
Characteristics of ROE:
- Measures profitability relative to shareholders' equity.
- Focuses on returns generated from shareholders' investments.
- Useful for comparing companies within the same industry.
ROE Formula:
ROE= NET Income/ Shareholders Equity.
Also Read: Kunal Bahl: A Visionary Entrepreneur and Shark Tank Judge
ShareHolders Equity= Total Assets – Total Liablities
Comparing ROCE and ROE | |||
Aspect | ROCE | ROE | |
Focus | Total capital employed (equity + debt) | Shareholders' equity | |
Calculation Basis | EBIT and total capital employed | Net income and shareholders' equity | |
Usefulness | Comparing companies with different capital structures | Comparing companies within the same industry | |
Debt Consideration | Includes impact of both equity and debt | Focuses solely on equity, excluding debt impact | |
Investment Considerations
For ROCE:
- Comprehensive View: Provides a holistic view of profitability, including the impact of debt.
- Efficiency Measure: Useful for evaluating how well a company uses all its capital to generate profits.
For ROE:
- Shareholder Focus: Highlights the returns generated specifically for shareholders.
- Industry Comparison: Ideal for comparing companies within the same industry, where capital structures are similar.
Also Read: Unveiling the Secrets of Multibagger Stocks: A Guide for Investors