ROCE & ROIC
Returns on all the capital at work — often a truer quality signal than ROE alone.
ROEProfit generated per rupee of shareholders’ equity. has a blind spot: it ignores debt. Two companies with identical ROEProfit generated per rupee of shareholders’ equity. can be wildly different in quality if one is debt-free and the other is drowning in loans. ROCEProfitability on all capital — equity plus debt. and ROIC fix this by measuring returns on ALL the capital employed — equityA unit of ownership in a company. plus debt.
- ROCEProfitability on all capital — equity plus debt. (Return on Capital Employed) = operating profitEarnings before interest, tax, depreciation, amortisation. ÷ (equityA unit of ownership in a company. + debt). Returns on total long-term capital.
- ROIC (Return on Invested Capital) = after-tax operating profitEarnings before interest, tax, depreciation, amortisation. ÷ invested capital. A refined cousin.
Because they count debt as capital, ROCEProfitability on all capital — equity plus debt./ROIC can’t be faked by borrowing — making them often a TRUER quality gauge than ROEProfit generated per rupee of shareholders’ equity.. The gold standard: a company with high ROCEProfitability on all capital — equity plus debt. and a high ROEProfit generated per rupee of shareholders’ equity. that aren’t propped up by leverageControlling a large position with a small amount of money.. If ROE is high but ROCE is mediocre, debt is doing the heavy lifting — be cautious.
Key takeawayROCEProfitability on all capital — equity plus debt./ROIC measure returns on all capital (equityA unit of ownership in a company. + debt), so leverageControlling a large position with a small amount of money. can’t flatter them — often a truer quality signal than ROEProfit generated per rupee of shareholders’ equity.. Want both high.
FAQs
ROE is high but ROCE is low — what does that mean?
It usually means the company is using a lot of debt: leverage boosts ROE while ROCE (which includes that debt) stays modest. It’s a sign the headline ROE is debt-driven and potentially fragile, not a sign of underlying quality.