ROE vs ROCE: what's the difference?
Return on equity and return on capital employed both measure how well a company turns capital into profit — but they count different capital. The gap between them tells you something important: how much a company's returns depend on borrowing.
The short answer
Return on equity (ROE) measures profit against shareholders' money alone. Return on capital employed (ROCE) measures profit against all the capital a business uses — equity plus debt. That single difference — whether debt is included — is what separates them, and why looking at both tells you more than either alone.
Return on equity
ROE answers: for every pound shareholders have invested, how much profit does the company generate? A consistently high ROE — above 15–18% — is a signature of a quality business. It's the metric Warren Buffett has long favoured.
But ROE has a blind spot: debt flatters it. A company can borrow heavily, use that debt to generate profit, and report a high ROE — because the denominator only counts equity, not the borrowed money. Two companies with identical ROE can have completely different risk profiles if one is debt-free and the other is leveraged to the hilt.
Return on capital employed
ROCE closes that blind spot. By measuring profit against all capital employed — equity and debt — it shows how efficiently the business uses every pound at its disposal, regardless of where that pound came from. A company can't hide weak operations behind cheap borrowing in its ROCE the way it can in its ROE.
Seeing them side by side
| ROE | ROCE | |
|---|---|---|
| Measures return on | Shareholders' equity only | Equity + debt (all capital) |
| Profit figure used | Net profit (after interest & tax) | Operating profit (before interest) |
| Affected by debt? | Yes — debt can inflate it | No — debt is included in the base |
| Best for | Shareholder returns | Operational efficiency |
The insight is in the gap
Here's what makes using both powerful. If a company's ROE is much higher than its ROCE, that gap is being created by debt — borrowing is amplifying shareholder returns. A little of that is normal and fine. A lot of it means the impressive ROE is really a leverage story, and leverage cuts both ways: it magnifies losses in a downturn just as it magnifies gains in good times.
When ROE and ROCE are close together, the returns are coming from the business itself, not from borrowing. That's the more durable, higher-quality picture.
Which should a value investor use?
Both, together. ROE tells you what shareholders are earning; ROCE tells you whether the underlying business is genuinely efficient or just heavily borrowed. Reading them side by side — and checking the debt-to-equity ratio alongside — gives you a far truer picture of business quality than any one metric. A company with high ROE, high ROCE and low debt is the real thing: strong returns that aren't a borrowing trick.
Common questions
What is the main difference between ROE and ROCE?
ROE measures profit against shareholders' equity only, while ROCE measures profit against all capital employed — equity plus debt. ROCE therefore isn't inflated by borrowing the way ROE can be.
Why is ROCE sometimes better than ROE?
ROCE can't be flattered by debt. Because it includes borrowed money in its base, it shows true operational efficiency, whereas a company can boost its ROE simply by taking on more debt.
What is a good ROE and ROCE?
As a rough guide, consistently above 15% is strong for both, and above 18–20% is excellent — provided it's sustained over many years rather than a single good period. What matters most is that the two are reasonably close, which shows returns aren't driven mainly by debt.
Should ROE be higher than ROCE?
Often it is, because ROE uses net profit and can be amplified by debt. A small gap is normal. A large gap between a high ROE and a lower ROCE indicates the company relies heavily on borrowing to boost shareholder returns.