What is the Difference Between ROCE and ROE?
🆚 Go to Comparative Table 🆚ROCE (Return on Capital Employed) and ROE (Return on Equity) are both financial ratios used to evaluate a company's financial performance, but they differ in their focus and the factors they consider. Here are the key differences between ROCE and ROE:
- Focus: ROCE considers both debt and equity financing, while ROE is focused solely on equity. ROCE measures the company's overall efficiency in generating profits from all available capital, including debt and equity, while ROE measures the company's profitability from shareholders' equity.
- Capital: ROE considers only the shareholder capital employed, whereas ROCE considers the total capital employed, including debt, by the company.
- Indicator of: ROCE is an indicator of a company's ability to generate returns on invested capital, while ROE is an indicator of a company's ability to generate returns for its shareholders.
- Calculation: The formula for ROE is net income divided by shareholders' equity. On the other hand, ROCE is calculated using the formula: ROCE = EBIT (Earnings Before Interest and Taxes) divided by capital employed.
- Industry Comparisons: ROCE is useful for comparing companies in capital-intensive industries and evaluating investment returns within a particular industry. ROE, on the other hand, is useful for evaluating investment returns of a company within a particular industry and comparing it with other companies.
In conclusion, both ROCE and ROE provide important insights into a company's financial performance. To get a comprehensive picture of a company's financial health, it is essential to consider both of these factors.
Comparative Table: ROCE vs ROE
Here is a table summarizing the differences between Return on Equity (ROE) and Return on Capital Employed (ROCE):
| Parameter | ROCE | ROE |
|---|---|---|
| Concept | Measures 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 |
| Components | Considers both equity and borrowed capital | Considers only equity capital |
| Purpose | Shows how efficiently a company generates profits from its capital employed | Indicates a company's profitability from shareholders' equity |
| Capital Considered | Total capital employed, including debt and equity | Only considers shareholder capital employed |
| Financial Metric | More comprehensive as it considers both debt and equity | Focused solely on equity |
ROCE is a better measure of a company's overall efficiency in generating profits from all available capital, including debt and equity, while ROE is a better measure of a company's profitability from shareholders' equity. Both ratios are important for analyzing a company's financial performance, and it is recommended to consider both factors when evaluating a company.
- ROIC vs ROCE
- ROE vs ROA
- ROA vs ROI
- Cost of Equity vs Return on Equity
- Debt Ratio vs Debt to Equity Ratio
- Cost of Capital vs Cost of Equity
- EVA vs ROI
- IRR vs ROI
- Earnings vs Revenue
- Cost of Equity vs Cost of Debt
- Cost of Capital vs Rate of Return
- Debt vs Equity
- Equity vs Royalty
- NRE Account vs NRO Account
- Revenue vs Turnover
- CFO vs CEO
- Operating Leverage vs Financial Leverage
- Profit vs Revenue
- Cost Benefit Analysis vs Return on Investment