Return on Equity (ROE) vs. Return on Capital (ROC): What's the Difference? (2024)

Return on Equity (ROE) vs. Return on Capital (ROC): An Overview

Return on equity (ROE) and return on capital (ROC) measure very similar concepts, but with a slight difference in the underlying formulas. Both measures are used to decipher the profitability of a company based on the money it had to work with.

Return on Equity (ROE)

Return on equity measures a company's profit as a percentage of the combined total worth of all ownership interests in the company. For example, if a company's profit equals $10million for a period, and the total value of the shareholders' equity interests in the company equals $100 million, the return on equity would equal 10% ($10million divided by $100 million).

The Formula for Calculating ROE Is As Follows:

$\text{Return on equity} = \frac{\text{Net income}}{\text{Average shareholders' equity}}$Returnonequity=Averageshareholders’equityNetincome​

There are a numberof different figures from the income statement and balance sheet that a person could use to get a slightly different ROE. A common method is to take net income from the income statement and divide it by thetotal shareholder equity on the balance sheet. Software such as Excel can help with these calculations.

If a company had a net income of $50,000 on the income statement in a given year and recorded total shareholders equity of $100,000 on the balance sheet in that same year, then the ROE is 50%. Some top companies routinely have an ROE north of 30%.

Return on Capital (ROC)

Return on capital, in addition to using the value of ownership interests in a company, also includes the total value of debts owed by the company in the form of loans and bonds.

For example, ifa company's profit equals $10million for a period, and the total value of the shareholders' equity interests in the company equals $100 million, anddebts equal $100 million, the return on capitalequals 5% ($10million divided by $200 million).

The Formula for Calculating ROC Is As Follows:

$\text{Return on capital} = \frac{\text{Net income}}{\text{Debt} + \text{Equity}}$Returnoncapital=Debt+EquityNetincome​

As with ROE, an investor could use various figures from the balance sheet and income statement to get slightly different variations ofROC. Ultimately what matters is that the investor uses the same calculation over time, as this will reveal whether the company is improving, staying the same, or declining in performance over time.

If a company had a net income of 50,000 on the income statement in a given year,recorded totalshareholders equity of 100,000 on the balance sheet in that same year, and had total debts of 65,000, then the ROC is 30% (50,000 / 165,000).This is a very quick way to calculate ROC, but onlyfor very simple companies. If a company has lease obligations this too needs to be factored in. If a company has one-timegains that aren't useful for comparing the ratio year-to-year, then these would need to be deducted.