ROE VS ROCE

Roe Vs Roce

ROE (Return on Equity) and ROCE (Return on Capital Employed) are both important financial ratios, but they measure different things. While ROE reveals how effectively a company uses shareholders’ equity to generate profit, ROCE demonstrates how efficiently a company uses all its sources of capital, including debt. 

Contents:

ROCE In Share Market

ROCE stands for Return on Capital Employed, and it measures a company’s profitability in relation to all its capital, both equity and debt. In other words, it tells you how efficiently a company uses its capital to generate earnings.

To illustrate, let’s look at an example: If a company has a ROCE of 15%, it generates a return of ₹15 for every ₹100 of capital it uses. This can be compared to companies in the same industry to assess performance. For example, if most companies in the industry have a ROCE of 10%, the company in question could be seen as more efficient in generating profits from its capital.

What Is ROE In Share Market?

ROE, or Return on Equity, is a financial ratio that measures the profitability of a company relative to its equity. It gives us an idea of how well a company utilizes its shareholders’ equity to produce profits.

For example, if a company’s ROE is 20%, it has generated ₹20 of profit for every ₹100 of shareholders’ equity. Similar to ROCE, comparing the ROE of different companies within the same industry can provide valuable insights. If the industry standard is an ROE of 15%, a company with an ROE of 20% may be seen as efficiently using its equity.

Difference Between Roce And Roe

The primary difference between Roce vs Roe is that while ROCE considers all sources of capital (including debt) to measure the efficiency in generating profits, ROE focuses solely on a company’s equity. 

ParametersROCEROE
ConceptMeasures how effectively a company uses all its capital (equity and debt) to generate profits.Evaluates how well a company utilizes shareholders’ equity to yield profits.
ComponentsConsiders both equity and borrowed capital.Considers only equity capital.
PurposeHelps determine the efficiency of total capital employed.Measures the profitability from shareholders’ perspective.
CalculationEBIT/Capital Employed.Net Income/Shareholder’s Equity.
IndicationA high ROCE can suggest better management of total capital.A high ROE implies efficient use of equity.
SuitabilityBeneficial for companies with substantial debt.Suitable for equity-intensive firms.
RiskDoesn’t factor in financial risk.A higher ROE might indicate higher financial risk.

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Roe Vs Roce – Quick Summary

  • ROCE assesses a company’s ability to generate profits from all its capital (equity and debt).
  • ROE gives insights into a company’s efficiency in generating profits from shareholders’ equity.
  • The primary difference between ROE and ROCE lies in the capital considered in their calculation.
  • ROCE is more comprehensive as it considers both debt and equity, whereas ROE is focused solely on equity.
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Roe Vs Roce – FAQs  

What Is Difference Between Roe And Roce?

The primary difference between ROE (Return on Equity) and ROCE (Return on Capital Employed) is that ROE focuses solely on equity capital, demonstrating the return that a company has generated on shareholders’ equity. On the other hand, ROCE incorporates equity and debt, indicating how efficiently a company utilizes all its available capital, not just equity, to generate returns.

What Is A Healthy Roce And Roe Number?

A healthy ROCE number typically exceeds the rate at which the company borrows, which varies by industry and economic conditions. As a rule of thumb, a ROCE over 15-20% is often seen as strong.

For ROE, again, the numbers can vary by industry, but generally, a ROE above 15-20% is considered good. However, excessively high ROE might indicate higher risk due to potential over-leveraging.

What is the formula of ROCE and ROE?

ROCE = EBIT (Earnings Before Interest and Taxes) / Total Capital Employed

ROE = Net Income / Shareholders’ Equity

Is A High Roce Better?

A high ROCE is generally better as it indicates that the company is efficient at turning capital into profits. It signifies that the company is making better use of its capital to generate returns, which can attract investors.

What Is a Good Roe Ratio?

A good ROE varies between industries and over time, but an ROE above 15-20% is generally considered good. A company with a high ROE is seen as having the ability to generate cash internally, which is a favorable sign for investors.

Is High Roe Good?

A high ROE is generally seen as a good sign because it indicates that the company effectively uses its shareholders’ equity to generate profits. However, an exceptionally high ROE might reflect high financial leverage, which can carry more risk. It’s crucial to compare the ROE with peer companies in the same industry to make a proper assessment.

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