ROE vs ROCE: Which Matters More When Screening Indian Stocks?
ROE and ROCE are both profitability ratios but they measure different things. Knowing when to use each is critical for stock screening in India.
ROE vs ROCE — The Quick Answer
- •ROE (Return on Equity) = Net Profit ÷ Shareholders' Equity
- •ROCE (Return on Capital Employed) = EBIT ÷ (Total Assets − Current Liabilities)
ROE measures how efficiently a company generates profit from shareholders' money. ROCE measures how efficiently it uses all capital — including debt.
When ROE Can Be Misleading
A company can have a high ROE simply by taking on a lot of debt. If a company borrows heavily (high D/E ratio) and deploys it at modest returns, ROE looks great while the underlying business economics are poor.
Example: Company A has 20% ROE but 3x D/E ratio. Company B has 18% ROE but zero debt. Company B is the better business.
This is why ROCE matters — it includes debt in the denominator, so a company can't inflate it by borrowing.
When to Prefer ROE
For asset-light businesses (IT services, FMCG, platforms), ROE is the better metric because they don't need much capital to grow. Companies like TCS and Infosys have minimal debt, so ROCE ≈ ROE anyway.
Thresholds ExcelScreener Uses
| Ratio | Green | Yellow | Red |
|---|---|---|---|
| ROE | ≥ 30% | 15–30% | < 0% |
| ROCE | ≥ 24% | 12–24% | < 0% |
A company scoring well on both (ROE > 30% AND ROCE > 24%) with low D/E is the ideal trifecta — efficient, profitable, and not dependent on borrowed capital.
Sector-Specific Notes
Banks and NBFCs: ROE is the primary metric; ROCE is not directly applicable because lending is their business model. An NBFC with 15% ROE is doing well.
Metals and Commodities: Both ratios are cyclical — don't anchor to a single year. Use 3-year averages.
Real Estate Developers: ROCE is more meaningful here because they're capital-intensive and carry large land-bank assets.
How ExcelScreener Scores ROE and ROCE
ExcelScreener checks ROE and ROCE against configurable thresholds from your scoring profile. The default weights are:
- •ROE: up to ±10 points
- •ROCE: up to ±8 points
You can increase ROCE's weight if you want to penalise highly leveraged companies more heavily.
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