What is the di!

erence between return on equity

and return on capital?
By Cory Mitchell, CMT | Updated May 10, 2018 — 9:00 AM EDT

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

Calculating Return on Equity

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 $10 million 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% ($10 million divided by $100 million).

There are number di!erent figures from the income statement and balance sheet that a person
could use to get a slightly di!erent ROE. A common method is to take net income from the income
statement and divide it by total shareholders equity on the balance sheet. 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%.

Calculating Return on Capital

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

As with ROE, and investor could use various figures from the balance sheet and income statement to
get slightly di!erent variations of ROC. Ultimately what matters is that the investor uses the same
calculation over time, as this will reveal wether the company is improve, staying the same, or
declining in performance over time.

A common method for calculating ROC is to take long-term debt from the balance sheet and add it to
total shareholders equity. Divide net income by this total debt+equity figure. If a company had a net
income of 50,000 on the income statement in a given year, recorded total shareholders 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 only for very simple companies. If a
company has lease obligations this too needs to factored in. If a company has one time gains which
aren't useful for comparing the ratio year-to-year, then these would need to be deducted. For
additional ways of calculating ROC, see Return on Invested Capital.

ROC and ROE are well-known and trusted benchmarks used by investors and institutions to decide
between competing investment options. All other things being equal, most seasoned investors
would choose to invest in a company with a higher ROE and ROC when compared to a company with
lower ratios.

Return on Sales
Return on sales (ROS) is another ratio that o"en comes up when discussing ROE and ROC.
Businesses and accountants measure ROS to gauge how e!iciently profit is generated against sales.

Return on sales reflects operating performance. ROS is commonly referred to as "net profit margin"
or "operating profit margin." The formula used to generate ROS varies, but the standard equation is
net income before interest and taxes divided by the total sales revenue.

On its own, ROS doesn't provide a ton of information because it is a relative value. Knowing the
value is 10% or 30% doesn't explain much as to whether a business is good or not, as ROS will vary
across di!erent industries.

To see if an ROS is strong or weak, it needs to be compared across time or between competitors. The
most e!icient companies tend to have the highest ROS values within their industry.

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RELATED TERMS
Return on Sales (ROS) Rate Of Change - ROC
Return on sales (ROS) is a ratio used to evaluate The rate of change - ROC - is the speed at which
a company's ... a variable changes ...

Return on Equity (ROE) DuPont Analysis

Return on equity refers to the profitability DuPont analysis is a fundamental performance
returned in direct ... measurement framework ...

DuPont Identity Average Return

An expression that breaks return on equity (ROE) The simple mathematical average of a series of
down into three ... returns generated ...