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ROE vs. ROCE: Detailed Analysis of Return on Equity and Return on Capital Employed

ROCE and ROE

When evaluating a company's financial performance, two important metrics to consider are Return on Capital Employed (ROCE) and Return on Equity (ROE). Both of these ratios help investors understand how efficiently a company is using its resources to generate profits, but they focus on different aspects of the company's finances.

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Return on Capital Employed (ROCE)

ROCE measures a company's profitability and the efficiency with which its capital is employed. It is a useful indicator for assessing how well a company is generating profits from its total capital, which includes both equity and debt.

Characteristics of ROCE:

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ROCE Formula:

Return on Equity (ROE)

ROE measures a company's profitability relative to shareholders' equity. It indicates how effectively the company is using the money invested by its shareholders to generate profits.

Characteristics of ROE:

ROE Formula:

ROE= NET Income/ Shareholders Equity.

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ShareHolders Equity= Total Assets – Total Liablities 

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                                            Comparing ROCE and ROE

 

Aspect

ROCE

ROE

 

Focus

Total capital employed (equity + debt)

Shareholders' equity

 

Calculation Basis

EBIT and total capital employed

Net income and shareholders' equity

 

Usefulness

Comparing companies with different capital structures

Comparing companies within the same industry

 

Debt Consideration

Includes impact of both equity and debt

Focuses solely on equity, excluding debt impact

Investment Considerations

For ROCE:

For ROE:

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