Understanding of ROCE & ROE in Equity, Importance of ROCE and ROE during selection on investment in Equity.

 

ROCE: Return on Capital Employed

Definition:
ROCE is a financial ratio that measures how efficiently a company uses its capital to generate profits. It shows how much profit a company earns for every rupee of capital employed.

ROCE= {Earnings Before Interest and Tax (EBIT)​×100} / Capital Employed

Where:

• EBIT = Operating profit (before interest and taxes)

• Capital Employed = Total Assets − Current Liabilities
  (or alternatively: Equity + Long-term Debt)

🔍 Interpretation:

Higher ROCE = The company is using its capital efficiently to generate profits.

> 15% is considered good for most industries.
> 30% is considered excellent and often indicates a competitive advantage or strong operating efficiency.

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ROE: Return on Equity

Definition:
ROE measures how effectively a company uses shareholders' equity to generate net profit. It shows how much profit a company makes for every rupee invested by shareholders.

ROE= {Net Profit (PAT)​×100} / Shareholders’ Equity

Where:

• Net Profit (PAT) = Profit After Tax

• Shareholders’ Equity = Share Capital + Reserves & Surplus (i.e., Net Worth)

🔍 Interpretation:

• Higher ROE = Better efficiency in using investor funds to generate earnings.

• > 15% is considered good in most sectors.

• > 30% is considered very high and often indicates strong profitability or competitive advantages.