Stock Market · Fundamental Analysis

ROE & ROCE

ROE and ROCE are the two most important metrics for measuring the quality of a business. They tell you how efficiently management uses capital to generate returns.

ROE, Return on Equity

ROE = Net Profit ÷ Shareholders' Equity × 100

It measures how much profit is generated per rupee of shareholder capital. A 20% ROE means the company generates ₹20 profit for every ₹100 of equity invested.

> Look for consistent ROE above 15–20% over 5–10 years. That's a sign of a durable competitive advantage.

ROE pitfall: debt distortion

A company with high debt can show high ROE because debt reduces the equity denominator. This high ROE is not quality, it's risk.

This is where ROCE is more useful.

ROCE. Return on Capital Employed

ROCE = EBIT ÷ Capital Employed × 100

Capital Employed = Total Assets − Current Liabilities (includes both debt and equity)

ROCE measures return on ALL capital (debt + equity), not just equity. This eliminates the debt distortion in ROE.

= ROE tells you return for equity holders

= ROCE tells you return on all capital, more comparable across companies with different debt structures

The quality benchmark

Great businesses: ROCE above cost of capital (typically 12–15% for Indian companies). Consistent ROCE of 20%+ over a decade is exceptional.

A handful of Indian franchises sustain exceptional ROCE for decades: decorative paints above 30%, branded-innerwear licensees above 50%, and top consumer-lending NBFCs combining high ROCE with strong ROE. These are the companies that make long-term investors rich.

Always track ROE and ROCE across 5–10 years, not just the latest quarter.

Takeaway. ROE measures profit per equity rupee; ROCE measures profit per total capital. Consistent ROE 15%+ and ROCE above cost of capital over 10 years signals a quality business.