About the ROCE & ROE
Return on capital employed (ROCE) measures how much operating profit the business earns on all the long-term money in it — equity plus long-term debt. Return on equity (ROE) measures the profit after tax earned for the owners on their own money. Lenders look at ROCE against the interest rate they charge; investors look at ROE against what they could earn elsewhere.
Enter EBIT (profit before interest and tax), profit after tax, total assets, current liabilities and shareholders' funds from the latest balance sheet. Capital employed is computed as total assets less current liabilities, the definition most Indian bank formats use.
A ROCE well above the cost of debt means borrowing adds to owner returns; a ROCE below it means every rupee borrowed makes the owners poorer. The WACC calculator gives the blended hurdle to compare with.
How to use it
- 1Enter EBIT and profit after tax from the P&L.
- 2Enter total assets, current liabilities and equity from the balance sheet.
- 3Read capital employed, ROCE and ROE.
- 4Compare ROCE with your borrowing rate and ROE with your expected return.
How this is calculated
Capital employed = total assets − current liabilities ROCE = EBIT ÷ capital employed ROE = profit after tax ÷ shareholders' funds
Frequently asked questions
Why use EBIT for ROCE and PAT for ROE?
ROCE measures the return generated for all capital providers before the split between interest and dividends, so it uses profit before interest and tax. ROE is the owners' share after interest and tax.
Should revaluation reserves be in equity?
For ROE, most analysts exclude revaluation reserves and include only paid-up capital and free reserves. Use the figure your bank format uses for net worth.
Is a high ROE always good?
Not if it comes from heavy borrowing. A business with thin equity and large debt shows a high ROE and a fragile balance sheet. Read ROE alongside the debt-equity ratio.
What ROCE do banks want?
There is no statutory floor; a ROCE comfortably above the lending rate supports the case that the loan is productive. Many appraisal notes look for double digits in manufacturing.