Module 4 ยท Valuation and Ratios
Return on equity and return on capital show how efficiently a company turns money into profit.
ROE (return on equity) measures profit relative to shareholders' equity - how well the company rewards the owners' money. Higher is generally better, but very high ROE can come from heavy leverage.
ROCE (return on capital employed) measures profit against all capital used, debt and equity. It shows how efficiently the whole business uses its capital.
Consistently high ROE and ROCE over many years are hallmarks of a quality business with a competitive advantage.
Example: TCS
TCS posts a very high ROE and ROCE because it needs little capital to run and earns strong profits - a sign of a high-quality, asset-light franchise.
ROE measures profit relative to:
Why might a company's ROE look high simply because it is heavily in debt?