Return on capital: how to read ROCE and ROE

12 October 2026 · 1 min read · Pokharna Research

A business is only as valuable as the returns it earns on the money invested in it. Two ratios are used most often to describe those returns.

What each one measures

• Return on equity (ROE) is profit after tax divided by shareholders' equity. It tells you what owners earn on their own capital.
• Return on capital employed (ROCE) is operating profit (EBIT) divided by capital employed, commonly total assets less current liabilities. It describes the return on all long-term capital, whether it came from owners or lenders.

Why the difference matters

A company can raise ROE simply by borrowing more, while the underlying business has not improved. ROCE is less affected by the mix of debt and equity, so comparing the two helps separate business quality from financial structure.

Questions to ask

1. Is the return stable over many years, or does it jump around with the cycle?
2. Is ROE high because the business is good, or because equity is small relative to debt?
3. Is the return higher than the company's cost of funding? A return below the cost of capital means growth may destroy value.
4. How much of the profit is backed by operating cash flow?

Cautions

Definitions differ between data providers, and book values depend on accounting choices and the age of assets. Always state the definition you used and compare like with like. You can try the calculation yourself with the ratio calculator.

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