ROCE vs ROE

What is ROE?

ROE(Return of Equity) state that in any business you cannot find any borrowings to run the business, means the business is running on shareholders capital and do not have to return anyone money adding interest.

What is ROCE?

In ROCE(Return Of Capital Employed), the ability to run the business on capital shares with borrowings(debt).

Differences

CASE 1- You start the business with Rs2000 with your friend Rs1000 each, now both of you are 50-50% partner,

Here Rs2000 is an Equity

Assume after one year you get profit of Rs.1000

or 50% profit, which you can called ROE. In which you invested Rs2000 and end of one year get Rs3000 which will divides between you and your friend (Rs1500 each)

CASE 2- You start the business with Rs2000 on which you invest Rs.1000 and remaining you borrow from your friend, here the Rs.2000 invested we called CE(Capital Employed).

Also here you get 50% profit or Rs1000 profit, which called ROCE. In which you invested Rs2000 and end of one year get Rs3000 but here you have to return your borrowings or debt to your friend.

What you must see during analysis, ROCE or ROE?

First of all you have to check wheather Company has borrowings or not, if it is then go with the ROCE otherwise go with ROE, you may notice that when there is no debt then ROCE and ROE is equal.

Now we may hope you understand these terms and their differences but if you want to learn in depth knowledge of these terms you can checkout these books by clicking below.

Fundamental Analysis of Shares BUY NOW

What is P/B ratio (Price to Book value)?

P/B Ratio:-

In general P/B = Share Price/Book Value per share

Now What is Book Value(B.V) per Share?

If the company become bankrupt than how much amount you get state 'BOOK VALUE' 

Book Value = Assets - Liabilities

But it is Total Book Value and you need Book value per share, so that we divides by total share of the company i.e

Book Value per share = Book Value/Total Share

Now let us take an example-

Take Asset=1000 and Liabilities=200

so Book Value Become 800 (Assets - Liabilities)

Let Total Share of the Company is 100

then Book Value per share = 800/100 = 8

If Share Price = 24 (Let us assume)

Then P/B Ratio = 24/8 = 3

Which means for every 1Rs net asset of the company, you pay 3Rs to buy the share and you buy the share at 24Rs (assume above)  and company is become bankrupt then you get 8Rs.

Where to Apply?

Always give importance to those company which have hard Asset like steel, Cement, or any Infrastructure.

Don't take those which doesn't need much hard assets like TCS, Wipro or any other Software Company.

Tip- P/B Ratio should always between 3 to 6 Ratio

What is PE Ratio?

P/E Ratio

It denotes how much multiple you pay for 1 year income of share of the company, PE can be higher when company shows increasing profit.

Higher the share price means higher is the P/E

It shows 

1-The stock is undervalued or Overvalued.

2-The calculation of future price target.

P/E = Share Price/EPS

EPS means How much you earn for per share per year.

EPS=Net Profit/No. Of Shares

Important- If you want to understand PE Ratio in depth and become a master of it, you must read the book of Cam Marcus, The author of the book called 

Making Money by Understanding PE Ratios, Buy Now

Tip- Compare current P/E with historical P/E then compare with historical P/E with PROFIT GROWTH history.

If Profit growth goes like 100%, 150%, or 180% in three or five years then market give it's high P/E ratio as market assume that in future it's shows more profit growth.

If Profit goes slowly year by year then it's P/E automatically low or fair position.

You can go with or invest in high P/E ratio Company as current it seems Costly but As profit growth goes up you find the company is become fair valuable for you.

Market Capital and Enterprise Value

Market Capital:- 

The amount required to be an Owner of the company, means if you want to buy any particular company you can check market capital of the company.

Market Cap. ~ share price * no. of sahres 

Enterprise Value:- 

It denotes the real value of the Company to buy or to become an owner,

Then what is the difference between the term "Market Cap." and "Enterprise Value"?

Let's understand in Market Cap. we do not talk about companies cash and debt while in enterprise value we add both.

Let us take an example, if you want to Buy a company and company owner wants 100Rs for his company to sell that means the market cap.is 100Rs, Now imagine you buy that company and there is the Vault in the company having 20Rs inside it which now it's your's and Company's Ex-Owner already told you that the company has 10Rs Debt(loan) which now you have to pay as you are the current owner.

Now understand that you buy the company of 100Rs and you get 20Rs in the Vault and you have to pay 10Rs as debt. So in real you buy the company of Rs90 as you get 20 in vault and you paid 10Rs as debt., Now see below for Numeric understand.

Enterprise Value= Market Cap. - Cash + Debt(loan)

Enterprise Value=100Rs - 20Rs + 10Rs

                               = 90Rs

Now you understand both Market Cap. and Enterprise Value, if any any other query you can suggest us and any suggestion you want to give then Comment us.