What is the difference between return on equity and return on capital?
Courtesy : Investopedia
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 capital essentially is the same formula as return on equity, but with the addition of one component. 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 the company in the first example also owed $100 million in debts, the return on capital would drop to 1% ($2 million divided by the sum of $100 million in equity and $100 million in debts).
Both measures 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.
An eye opener article for those who blindly recommends shares on TV shows based on technical analysis.
ReplyDeleteWas waiting for value pick since 5 AM,little disappointed. But felt happy reading ROE and ROC.
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ReplyDeleteAlready informed that ,new stocks will be suggested only on first and third Saturday's of each month.
DeleteDue to preoccupation , further messages will be replied only on Monday
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