What is the Difference Between ROIC and ROCE?
🆚 Go to Comparative Table 🆚ROIC (Return on Invested Capital) and ROCE (Return on Capital Employed) are both profitability ratios used in fundamental analysis to understand how well a company's capital is being employed to generate returns. However, there are some key differences between the two:
- Scope: ROCE considers the total capital employed, which includes both debt and equity financing, while ROIC is more refined and focuses on the invested capital actively circulating in the business.
- Calculation: ROIC is calculated by dividing net operating income by invested capital, while ROCE is calculated by dividing net operating income by capital employed. The formulas are as follows:
- ROCE = EBIT / (Total Assets - Current Liabilities)
- ROIC = EBIT / Invested Capital
- Relevance: ROCE is based on pre-tax figures, making it more relevant from the company's perspective, while ROIC is more relevant from the investor's perspective because it gives them an indication of the company's performance after taxes.
- Investment Decision: While both ratios help investors determine how well a company is utilizing its capital, an investment decision cannot be made based solely on these indicators.
In summary, ROIC and ROCE are both important financial ratios that help investors evaluate a company's performance; however, they differ in scope, calculation, and relevance. It is essential to consider both ratios when making investment decisions to ensure a comprehensive understanding of the company's financial health.
Comparative Table: ROIC vs ROCE
Here is a table comparing the differences between ROIC (Return on Invested Capital) and ROCE (Return on Capital Employed):
| Particulars | ROIC | ROCE |
|---|---|---|
| Definition | ROIC measures the company's return on the total invested capital, which includes debt and equity financing. | ROCE measures the profit a business can make through the total capital employed, which is the total of debt and equity financing less short-term liabilities. |
| Formula | ROIC = Net Operating Income / Invested Capital | ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed |
| Scope | ROIC is more refined, focusing on the return of a company according to the capital that is actively circulating in the business. | ROCE is more extensive, considering the total capital employed, which includes both debt and equity financing. |
| Profitability | A company is considered profitable if its ROIC value is greater than the cost of capital. | A company is considered profitable if its ROCE value is greater than the cost of capital. |
In summary, both ROIC and ROCE are profitability ratios used to determine a company's efficiency in generating profits from its capital. However, ROIC is more focused on the return of a company according to the capital that is actively circulating in the business, while ROCE considers the total capital employed, which includes both debt and equity financing.
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- Cost of Equity vs Cost of Debt
- Quick Ratio vs Current Ratio
- Revenue vs Turnover
- EBITDA vs Operating Income