When we invest in a company, we want to know if it’s making good money, right? That’s why we look at ROCE (Return on Capital Employed) and ROE (Return on Equity). These are big names, but don’t worry, we will explain them in simple words!
What is ROCE?
ROCE tells us how well a company is using all its money (both own money and borrowed money) to make profits.
Formula: ROCE = EBIT / Capital Employed
EBIT = Profit before paying tax and interest
Capital Employed = Total money used in the business (own + borrowed)
Example:
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Company profit = ₹10,00,000
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Total money used (capital) = ₹50,00,000
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ROCE = 10,00,000 ÷ 50,00,000 = 20%
This means for every ₹1 the company uses, it makes ₹0.20 profit. Higher ROCE is better!
What is ROE?
ROE tells us how much profit a company makes using only shareholders’ money (not borrowed money).
Formula: ROE = Net Income / Shareholders' Equity
Net Income = Final profit after paying all bills, taxes, and interest
Shareholders' Equity = Money given by company owners (investors)
Example:
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Profit = ₹8,00,000
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Shareholder’s money = ₹40,00,000
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ROE = 8,00,000 ÷ 40,00,000 = 20%
This means that for every ₹1 invested, the company makes ₹0.20 profit. Higher ROE is better!
ROCE vs ROE – What’s the Difference?
Example: Comparing Two Companies
🔹 Big Company has good ROCE and ROE – it manages money well. 🔹 Small Company has high ROE because it has more loans and less investor money – riskier!
Why Should You Check ROCE & ROE?
ROCE – If you want to check how smartly the company uses all money.
ROE – If you are a shareholder and want to see how much profit you’ll get.
Best Idea? Look at both ROCE and ROE before investing!
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Final Thoughts
Both ROCE and ROE help us know if a company is doing well. ROCE checks total money usage, while ROE checks shareholder profit. Smart investors look at both before investing!
FAQs
🔹 1. Why is ROE sometimes higher than ROCE?
Because the company has more loans and less own money – this makes ROE look bigger!
🔹 2. What is a good ROCE or ROE?
ROE above 15-20% is great. ROCE above 12% means the company is using money well.
🔹 3. Can a company have high ROE but low ROCE?
Yes! If the company takes a lot of loans, ROE looks high, but ROCE will be low.
🔹 4. Should I check both ROCE and ROE?
Yes! ROCE shows capital efficiency, and ROE shows investor returns. Looking at both is the best!
Hope this helps! Happy investing!
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