ROE vs ROCE
ROE (return on equity) tells you how much profit a company earns on the shareholders’ money. ROCE (return on capital employed) tells you how much operating profit it earns on all the money in the business, borrowed money included. ROE can be pushed up by debt; ROCE shows whether the business itself earns well.
| Point | ROE | ROCE |
|---|---|---|
| Formula | Net profit ÷ shareholders’ equity | Operating profit (EBIT) ÷ (equity + debt) |
| Profit used | After interest and tax | Before interest and tax |
| Capital used | Owners’ money only | Owners’ money plus borrowings |
| Effect of debt | Debt can inflate it | Debt is counted, so no inflation |
| Good level | Above 15%; above 20% for years is excellent | Well above the interest rate the company pays |
| Best for | Shareholders’ view of returns | Comparing businesses with different debt |
What each ratio measures
ROE: a company with 20% ROE earns ₹20 a year on every ₹100 its owners have in it. It is the return that matters most to shareholders.
ROCE uses EBIT (earnings before interest and tax) and divides by all capital, equity plus debt. It measures how well the business uses every rupee, regardless of where the rupee came from.
A worked example
Company A has ₹100 crore of equity, no debt, and operating profit of ₹20 crore. After an assumed 25% tax, net profit is ₹15 crore. ROE is 15% and ROCE is 20%.
Company B has only ₹40 crore of equity and ₹60 crore of debt at 10% interest, so ₹6 crore goes on interest. Same ₹20 crore operating profit. Profit before tax is ₹14 crore; after tax, about ₹10.5 crore. ROE is about 26%, ROCE is still 20%.
B’s ROE looks far better, but the business earns exactly the same on its capital. The extra ROE came from borrowing, which adds risk if profit falls.
How to use them together
Look at both, plus debt to equity. If ROE is much higher than ROCE, check how much debt is doing the work. High ROE built on heavy debt is less impressive. ROE and ROCE both high, with low debt, usually point to a strong business.
When to use which
Use ROE to see what shareholders earn. Use ROCE to judge the quality of the business itself, especially when comparing companies with different amounts of debt. For banks and NBFCs, which borrow by design, ROE and return on assets are more commonly used than ROCE.
Common questions
Which is better, ROE or ROCE?
ROCE is better for judging the business, because debt cannot inflate it. ROE tells you the return on shareholders’ money. Check both.
Why is ROE higher than ROCE?
Usually because the company uses debt. Borrowed money increases profit per rupee of equity, as long as the business earns more than the interest rate.
What is a good ROCE?
It should be comfortably above the company’s cost of borrowing. A ROCE close to or below the interest rate means borrowing is not paying off.
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