What is the main difference between ROE and ROCE?

ROE compares profit attributable to shareholders with average shareholders' equity. ROCE compares operating profit with the average long-term capital used by the business, normally equity plus borrowings. ROE is the shareholder return lens; ROCE is the operating capital-efficiency lens.

Can ROE be higher than ROCE?

Yes. Debt can magnify the return to equity when the operating return on capital exceeds the after-tax cost of debt. Buybacks, a small equity base and exceptional profits can also lift ROE, which is why the bridge between the ratios matters.

Is ROCE useful for banks and NBFCs?

Usually not. Deposits and borrowings are operating raw material for a lender, not ordinary financing. EBIT and capital employed therefore do not have the same economic meaning as they do for an industrial company. Altys leaves ROCE unavailable for banks and NBFCs rather than forcing a misleading number.

Does a high ROE or ROCE make a stock attractive?

No. A return ratio describes business economics over a measured period. It does not establish durability, reinvestment opportunity, cash conversion, governance or whether the current share price already assumes an excellent outcome.

ROE vs ROCE: Which Return Metric Fits Which Business?

ROE and ROCE are often placed beside each other as if one is simply the better version of the other.

They are not.

Return on equity asks what the company earned for its shareholders. Return on capital employed asks what the operating business earned on the long-term capital supporting it.

That difference changes which profit sits on top of the ratio, which capital sits underneath it and which businesses the ratio can sensibly describe.

The two formulas

In Altys, the ratios are calculated as follows for a non-financial company:

ROE = TTM profit attributable to owners / average equity attributable to owners

ROCE = TTM EBIT / average capital employed

Average capital employed = average total equity + average total borrowings

TTM means trailing 12 months. The balance-sheet denominator uses the average of the current and year-ago period ends, because a full year of profit was earned using capital that changed through the year.

The matching matters:

ROE uses profit after interest and tax because that is the profit left for ordinary shareholders.
ROCE uses EBIT, or earnings before interest and tax, because it measures the operating return before deciding how the business is financed.
ROE uses owners’ equity.
ROCE uses equity plus borrowings.

If you put PAT on top of equity plus debt, or EBIT on top of equity alone, you create a ratio whose numerator and denominator answer different questions.

A ₹100 example

Imagine a company begins the year with average equity of ₹100 and average borrowings of ₹50. Its average capital employed is ₹150.

During the year it earns ₹30 of EBIT, pays ₹5 of interest and ₹5 of tax, leaving ₹20 of profit for shareholders.

Its ROCE is:

₹30 EBIT / ₹150 capital employed = 20% ROCE

Its ROE is:

₹20 shareholder profit / ₹100 equity = 20% ROE

The two happen to be equal. That is not a rule. Change the borrowing cost, tax rate, debt level or exceptional items and the two ratios separate.

Suppose the company can borrow cheaply while still earning 20% on total operating capital. More of the capital can be funded with debt, leaving a smaller equity denominator. After paying interest and tax, the residual profit may produce an ROE above ROCE.

That is financial leverage doing its job. It is helpful until operating return falls, borrowing cost rises or the debt has to be refinanced in a difficult market.

What the gap between ROE and ROCE can reveal

The difference is often more informative than either number alone.

ROE well above ROCE

Possible explanations include:

productive financial leverage
a small equity base after buybacks or accumulated distributions
one-time or non-operating income inside PAT
a difference between attributable equity and total equity

This is a prompt to inspect debt, interest coverage, exceptional items and equity movements. It is not automatically a positive sign.

ROCE well above ROE

Possible explanations include:

operating profit is strong, but interest, tax or minority interests absorb more of it before it reaches ordinary shareholders
the company holds substantial non-operating assets or investments
EBIT benefited from the operating structure while below-the-line items reduced attributable profit

Again, the ratio gap identifies a question. The financial statements supply the answer.

ROE and ROCE are both high

This can describe an attractive operating engine with a sensible financing structure. But an investor still has to ask whether the returns are repeatable, whether cash follows profit and whether the company can reinvest at similar rates.

ROE and ROCE are both low

The company may be operating in a capital-heavy, cyclical or structurally weak business. It may also be in a temporary investment phase. A low latest ratio is a starting point, not a diagnosis.

Three FY26 examples from Altys data

The table uses consolidated filings for the year ended 31 March 2026 and the point-in-time values available after those results were filed.

Company	FY26 ROE	FY26 ROCE	FY26 ROA	CFO / PAT
Infosys	31.21%	42.65%	19.31%	1.15x
Hindustan Unilever	30.65%	28.70%	18.84%	0.73x
Maruti Suzuki	14.43%	18.75%	10.45%	1.30x

Source: Altys calculations from consolidated company filings for the year ended 31 March 2026. Ratios use average balance-sheet denominators. CFO/PAT is cash flow from operations divided by attributable PAT. The companies are illustrations, not peers or recommendations.

The table is not a ranking. An IT-services company, a consumer-goods company and an automobile manufacturer have different asset intensity, pricing, working capital and reinvestment needs.

It shows why the ratio needs business context.

Infosys reported a higher ROCE than ROE. Hindustan Unilever’s ROE was slightly above its ROCE. Maruti’s ROCE was higher than its ROE. Those gaps do not tell us that one financing structure is universally superior. They tell us where to look next.

The cash column adds another check. A high accounting return is more persuasive when operating cash supports the profit over time. Even that should be examined across several years because working capital and tax timing can make one period unusually strong or weak.

Why ROCE is the wrong tool for banks and NBFCs

For a manufacturer, borrowing is a financing choice. For a bank, deposits and many borrowings are inputs used to produce interest income.

That changes the economics completely.

If we treat a bank’s deposits as ordinary debt inside capital employed, the denominator becomes enormous and conceptually confused. If we remove them, we exclude the raw material that produces the income. EBIT is also not a natural measure for a lender because interest expense is part of operations rather than a financing line sitting below operating profit.

Altys therefore leaves ROCE unavailable for banks and NBFCs. Missing is not zero, and unavailable is not an error when the metric does not fit the business.

For a lender, begin with:

ROE and ROA
net interest margin
cost of funds and deposit mix
credit cost
gross and net NPA
capital adequacy
loan and deposit growth

The HDFC Bank, ICICI Bank and Bajaj Finance pages use lender-specific evidence instead of forcing industrial-company ratios onto financial businesses.

Five traps that make a return ratio look better than the business

1. Using closing equity instead of average equity

Profit is earned across a period. A closing balance sheet is one date. If equity changed materially during the year, dividing by only the closing number can distort the result.

2. Treating a one-time gain as recurring profit

An asset sale, demerger gain or arbitration award can lift PAT and therefore ROE without improving the operating engine. Read the exceptional-item bridge before annualising the ratio.

3. Ignoring cash conversion

Revenue can be booked before cash is collected. Inventory can rise. Suppliers can temporarily fund growth. ROE and ROCE should be read with operating cash, receivables, inventory and payables.

4. Comparing unlike businesses

A retailer can earn strong ROCE through rapid capital turnover and a thin margin. A software company can earn it through a high margin and low asset intensity. The final percentage can match while the risks do not.

5. Confusing a good business with a good stock price

Neither ratio includes valuation. A company can sustain high returns and still disappoint shareholders if the purchase price assumed even more.

Which ratio should you use?

Use ROE when the central question is the return earned on shareholders’ capital. It is especially relevant for banks and other financial companies when paired with risk and capital-adequacy measures.

Use ROCE when you want to compare the operating efficiency of non-financial businesses with different mixes of debt and equity.

Use both for most non-financial companies. The gap helps you trace the path from operating return to shareholder return.

Then add three questions neither ratio answers:

How much of the profit became cash?
How much new capital can be reinvested at a similar return?
What return is already implied by the share price?

ROE and ROCE are not competing answers. They are two views of the same economic journey, one before financing and one after the shareholder receives the residual.

Public filing sources

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