What is ROCE Vs ROE in The Share Market?

What is ROCE Vs ROE in The Share Market?

Are you an investor? Or do you want to be an investor and want to know ways to measure how profitable a company is? Two crucial financial metrics are used to see the company's profitability: ROCE and ROE. Let's know the difference between ROCE vs ROE.

As we already mentioned ROCE and ROE are the two crucial metrics, and they help us to know the profitability of the companiesBut how they measure a company's performance in terms of profitability, how they differ from each other, and when we have to use it, So without knowing the basic concept of these financial metrics we can’t determine, let’s know it.

What is ROCE?

ROCE stands for Return on Capital Employed, it is a financial ratio, that is used to assess the company's profitability and capital efficiency. It measures how well a business can use capital to create more profits and considers equity financing and debt.  ROCE measures the company's overall efficiency generating a profit from all the available capital including equity and debt.

What is ROE?

ROE stands for Return on Equity, it is a financial ratio, that is used to assess how profitably and effectively an organization can generate profit from equity investmentROE focuses on equity and measures the company's profitability from the shareholder equity. It simply means they provide profit to the investor.

Formula Used to Calculate ROCE & ROE

In the above paragraph, we understand the basic concept of ROCE and  ROE, now we will know the formula used to calculate them.

ROCE formula Used to Calculate?

The formula used to calculate the ROCE (Return on Capital Employed) is given below:-

ROCE = EBIT/ Capital Employed x 100 

Where,

  • ROCE - Return on Capital Employed
  • EBIT - Earning Before Interest & Taxes
  • Capital Employed = Total Assets - Current Liabilities

How to calculate?

Let’s see the example, which helps you to understand, ROCE. And how it is used for analyzing and comparing companies.

Example

Suppose that there is Company X and their recent annual report operating income in 2023 is 60 crore Indian rupees. 

But the company has Total Assets worth 300 crore Indian rupees and 100 crore Indian rupees in Current Liabilities. The ROCE of the company for 2023 will be calculated as given below:-

ROCE = EBIT/Capital Employed x 100

= 60 Crores/ (Total Assets - Current Liabilities) x 100

60 Crores/ (300 Crores - 100 Crores) x 100

60 Crores / 200 Crores x 100

30%

So, Company X has a ROCE of 30% for 2023

Let’s see another company, Company W, has an EBIT of 200 Crores. With an EBIT of 200 Crores, Company X might seem a better investment than Company X which has 60 Crores EBIT. Well, the ROCE calculation can reveal some valuable insight. 

However, the company has Assets worth 600 crore Indian rupees and 300 crore Indian rupees in Current Liabilities.

ROCE = EBIT/Capital Employed x 100

= 200 Crores/ (Total Assets - Current Liabilities) x 100

200 Crores/ (600 Crores - 300 Crores) x 100

200 Crores / 300 Crores x 100

66.67%

So, Company X has a ROCE of 66.67% for 2023. 

Moreover, concerning ROCE, Company X is a better investment as it has 66.67% ROCE, while Company W has 30% ROCE.

ROE formula Used to Calculate?

The formula used to calculate the ROE (Return on Equity) is given below:-

ROE = Net Income / Shareholders’ Equity 

Where,

ROE - Return on Equity

Net Income - Total Revenue – Total Expenses

Shareholders’ Equity = Total Assets - Total Liabilities

How to calculate?

Let’s see the example, which will help you to understand ROE. And how it is used for analysis.

Example

Suppose that there is Company A has shareholder’s equity of 6,000,000 Indian rupees and anet income of 2,000,000 Indian rupees to determine:-

ROE = Net Income / Shareholders’ Equity

= 2,000,000/6,000,000

= 0.33

In the example above, the Company A has a 33% ROE. 

Difference between ROCE vs ROE

As we already mentioned all the information related to ROCE and ROE, so now you have the basic concept and you can find the difference between ROCE vs ROE, let’s see the difference between them.

Basis for Comparison ROCE ROE
Concept  It measures how well a business can use capital to create more profits. It measures how profitably and effectively an organization can generate profit from equity investment.
Full Form Return on Capital Employed Return on Equity
Components  Both equity financing and debt Focus on equity capital
Formula  ROCE= EBIT(Earning Before Interest & Taxes)/Capital Employed ROE = Net Income / Shareholders’ Equity
Considers  It considers the Operating Profit or Earning Before Interest & Taxes (EBIT) It considers the Net Profit or Profit After Tax (PAT)
Returns  Returns for Stakeholders (Equity+Debt) Return for Equity Shareholder
Indication  High ROCE (Return on Capital Employed) can suggest better management of total capital. High ROE (Return on Equity) can imply efficient use of equity.
Risk ROCE doesn’t factor in Financial risk  ROE might indicate higher financial risk.

Ending Words

Thus, We have mentioned all the details regarding the ROCE and ROE. Both ratios are important according to their terms. However, ROCE is better for measuring the company's overall efficiency in developing profitability from all the available capital. 

The same ROE is better for measuring the company's profitability from the equity shareholders. It simply, means both financial ratios are important to use both ratios together to get the complete picture of company performance. But first, we have to know the basic concepts such as equity share, preference shares, and all. 


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