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.

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