ROCE and ROE
Two ratios that set a company's profit against the money used to earn it
Index figures as on 31 August 2026
Verified 12 October 2026
For training and education only. Not investment advice.
Trainer notes
Ask: one company earned ₹135 crore and another earned ₹90 crore. Which did more with its shareholders' money? The room cannot answer without knowing how much money each used. Keep the two figures; they return on slide 5.
A profit figure means little until you know how much money was used to earn it.
ROCE sets profit against all the long-term money in the business. ROE sets it against the shareholders' money alone.
Trainer notes
ROCE is return on capital employed. ROE is return on equity. Older material calls ROE 'return on net worth' or RONW; it is the same ratio.
Two ratios and one building block
- ROCE
Return on capital
Profit before interest and tax ÷ capital employed. What the business earns on all the money in it.
- ROE
Return on equity
Profit after tax, less any preference dividend, ÷ average shareholders' equity. What is earned on the owners' money.
Capital employed
Shareholders' money plus borrowed money. One build: tangible net worth + total debt + deferred tax liability.
Take-away: Shareholders' equity, or net worth, is share capital plus the profits kept in the business over time.
Source for the formulas: ICAI Guidance Note on Division II - Ind AS Schedule III, January 2022 edition, Annexure B.
Trainer notes
Profit before interest and tax is often shortened to EBIT. ROCE uses it because interest is the lenders' share of the return, and ROCE measures the return to lenders and shareholders together. Capital employed is also commonly worked out as total assets minus current liabilities.
Both ratios for one company
COMPANY M
Shareholders' equity ₹600 crore. Debt ₹400 crore at 10% interest.
Profit before interest and tax ₹180 crore.
Tax at an assumed 25%.
- Capital employed: ₹600 crore + ₹400 crore = ₹1,000 crore. ROCE = 180 ÷ 1,000 = 18%.
- Interest: 10% of ₹400 crore = ₹40 crore. Profit before tax: 180 − 40 = ₹140 crore.
- Tax: 25% of ₹140 crore = ₹35 crore. Profit after tax: 140 − 35 = ₹105 crore.
- ROE = 105 ÷ 600 = 17.5%.
Result: ROCE 18% is before tax, on all the capital. ROE 17.5% is after tax, on the shareholders' part.
Illustration with an invented company and assumed figures. Equity and debt taken as unchanged in the year.
Trainer notes
The two numbers are close here by chance. They measure different things: one is before interest and tax on ₹1,000 crore, the other after both on ₹600 crore. With no change in equity during the year, average equity equals the closing figure.
Same business, different borrowing
COMPANIES P AND Q
Each uses ₹1,000 crore of capital and earns ₹180 crore before interest and tax.
P: all equity.
Q: equity ₹400 crore, debt ₹600 crore at 10%. Tax 25% (assumed).
- ROCE is the same for both: 180 ÷ 1,000 = 18%.
- P: no interest. Tax 25% of 180 = ₹45 crore. Profit after tax ₹135 crore. ROE = 135 ÷ 1,000 = 13.5%.
- Q: interest ₹60 crore. Profit before tax ₹120 crore, tax ₹30 crore, profit after tax ₹90 crore.
- Q: ROE = 90 ÷ 400 = 22.5%. A smaller profit, set against a much smaller equity base.
Result: Q's higher ROE comes from borrowing, not from a different business. ROCE shows the two are alike.
Illustration with two invented companies and assumed figures.
Trainer notes
Return to the opening question. P earned ₹135 crore and Q ₹90 crore, yet Q shows the higher ROE because its shareholders put in ₹400 crore against P's ₹1,000 crore. This is neither praise nor criticism of borrowing; the next slide shows the other side.
The same borrowing in a weak year
| P: all equity | Q: 60% debt | |
|---|---|---|
| Normal year | 13.50 | 22.50 |
| Weak year | 3.75 | -2.50 |
Read the chart
- Normal year: both earn ₹180 crore before interest and tax. Weak year: both earn ₹50 crore.
- P in the weak year: tax ₹12.5 crore, profit after tax ₹37.5 crore. ROE = 37.5 ÷ 1,000 = 3.75%.
- Q still owes ₹60 crore of interest. 50 − 60 = a loss of ₹10 crore. ROE = −10 ÷ 400 = −2.5%.
Illustration continuing companies P and Q. Assumed figures; no tax taken on the loss.
Trainer notes
Borrowing widens the swing in ROE in both directions. Interest is a fixed charge; profit is not. The weak-year figure of ₹50 crore is an assumption chosen to make the point, not a forecast.
Taking ROE apart
COMPANY M AGAIN
Sales ₹1,500 crore.
Profit after tax ₹105 crore.
Total assets ₹1,200 crore. Shareholders' equity ₹600 crore.
- Profit margin: 105 ÷ 1,500 = 7%. The profit kept from every ₹100 of sales is ₹7.
- Asset turnover: 1,500 ÷ 1,200 = 1.25. Each ₹1 of assets produced ₹1.25 of sales.
- Leverage: 1,200 ÷ 600 = 2. Each ₹1 of shareholders' money supports ₹2 of assets.
- 7% × 1.25 × 2 = 17.5%. That is the ROE worked out earlier.
Result: The same ROE can come from margin, from turnover or from borrowing. Ask which one.
Illustration with the same invented company. Sales and total assets are further assumed figures.
Trainer notes
The three parts multiply to ROE because sales and total assets cancel out: (profit ÷ sales) × (sales ÷ assets) × (assets ÷ equity) = profit ÷ equity. Total assets of ₹1,200 crore are the ₹1,000 crore of capital employed plus ₹200 crore of current liabilities.
Before you compare two figures, ask
| Question | The choices | Why it matters |
|---|---|---|
| Which profit? | Before interest and tax, or after tax. | ROCE is usually pre-tax and ROE post-tax. The two are not on the same footing. |
| What is in capital employed? | Net worth plus debt, or total assets minus current liabilities. | The same company can show different ROCE figures on different builds. |
| Capital on which date? | Opening, closing or the average of the two. | A large share issue or buyback in the year shifts the answer. |
| Anything unusual in the profit? | A one-time gain or loss in the year. | It lifts or cuts the ratio for that year only. |
Companies under Divisions I and II of Schedule III (Ind AS or not) must state what they put in the numerator and denominator of each ratio they disclose.
Trainer notes
The disclosure requirement is in Schedule III to the Companies Act, 2013, Division II, as amended in March 2021. Data websites each use their own build, so a ROCE from one source may not match the company's own figure.
What the indices imply
Implied return on equity = P/B ÷ P/E. Index ratios as on 31 August 2026. Approximate.
- NIFTY 50
- 14.3%P/B 2.92 ÷ P/E 20.36. About ₹14 of yearly profit per ₹100 of net worth.
- NIFTY BANK
- 12.7%P/B 1.74 ÷ P/E 13.73.
- NIFTY FMCG
- 24.1%P/B 7.68 ÷ P/E 31.93.
- NIFTY IT
- 27.6%P/B 5.49 ÷ P/E 19.90.
Source: NSE Indices, daily index close file for 31 Aug 2026 (P/E and P/B). Implied return on equity is our own division, not an NSE figure.
Trainer notes
P/B ÷ P/E works because (price ÷ book value) ÷ (price ÷ earnings) = earnings ÷ book value. It is a rough figure for the index companies taken together. Ratios differ widely by line of business, which is why comparisons are usually made within a sector. Do not call any sector better. Market figures are shown with a lag of at least 30 days, in line with SEBI's norms on price data used for education.
If you learnt this from older material
What older decks say
- The reader works out ROCE and ROE from the accounts.
- Capital employed has one formula: total assets minus current liabilities.
- A ROCE of 20% or more is 'very good'.
What holds now
- Companies under Divisions I and II of Schedule III disclose both, from 2021-22.
- The company states its own numerator and denominator. Builds differ.
- A change of more than 25% from the previous year has to be explained.
Take-away: There is no official pass mark for either ratio. The ratios themselves are unchanged.
Sources: Schedule III to the Companies Act, 2013, Division II (amended 24 March 2021); ICAI Guidance Note, January 2022.
Trainer notes
Ind AS means the Indian Accounting Standards. The requirement applies to financial years starting on or after 1 April 2021, that is, from 2021-22. The disclosure covers eleven ratios, including return on equity and return on capital employed. It sits in the notes to the financial statements under 'additional regulatory information'.
Four things people get wrong
Misconception'A high ROE means a strong business.'
What is trueIt can also come from heavy borrowing, or from an equity base shrunk by past losses or buybacks. Check ROCE and debt alongside.
Misconception'ROCE and ROE can be set side by side.'
What is trueROCE is usually before interest and tax on all capital. ROE is after both, on equity alone. A gap between them is not a finding by itself.
Misconception'Above 20% is good, below is poor.'
What is trueNo single mark fits all. A factory-heavy business and a services business need very different amounts of capital.
Misconception'One year's figure is enough.'
What is trueProfits of many businesses rise and fall with the cycle. Look at several years, and at what the profit was made of.
Trainer notes
For banks and other lenders, borrowed money is the raw material of the business, so ROCE is not normally used for them; return on assets and ROE are the usual measures. Do not use any of these ratios to call a share attractive or unattractive.
Check yourself
Question 1: A company has equity of ₹500 crore and debt of ₹300 crore. It earns ₹120 crore before interest and tax. What is its ROCE?
Answer: Capital employed = 500 + 300 = ₹800 crore. ROCE = 120 ÷ 800 = 15%.Question 2: The same company pays 10% interest on its debt and tax at an assumed 25%. What is its ROE?
Answer: Interest ₹30 crore. Profit before tax 120 − 30 = ₹90 crore. Tax ₹22.5 crore. Profit after tax ₹67.5 crore. ROE = 67.5 ÷ 500 = 13.5%.Question 3: A client says: 'This company has a ROE of 30%, so it must be a great business.' What would you ask first?
Answer: How much it has borrowed, what its ROCE is, whether the profit had a one-time item, and how the figure compares with its own past and with others in the same line of business. We explain the ratio; we do not rate the company.
Trainer notes
Questions 1 and 2 use one company so that the room sees the two ratios come from the same accounts.
Sources and disclaimer
Sources for the figures in this explainer
- Formulas for return on equity and return on capital employed: ICAI Guidance Note on Division II - Ind AS Schedule III to the Companies Act, 2013 (Revised January 2022), Annexure B.
- Disclosure of eleven ratios, the items in each and any change of more than 25%: Schedule III to the Companies Act, 2013, Division II, as amended by notification dated 24 March 2021.
- Applies to financial years starting on or after 1 April 2021: same ICAI Guidance Note, introduction.
- P/E and P/B of Nifty 50, Nifty Bank, Nifty FMCG and Nifty IT on 31 Aug 2026: NSE Indices, daily index close file for that date. Implied return on equity computed by us.
- Companies M, P and Q and all their figures, including the 25% tax rate, are invented for illustration. They do not refer to any real company.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).