What is the difference between return on equity and return on capital?

Answer:

Return on equity (roe) and return on capital (ROC), which measure very similar concepts, but with a slight difference in the underlying formulas. Both these measures are used to decipher the profitability of the company on the basis of the money it needs to operate.

The calculation of return on equity

Return on equity measures the Company’s profit in percent of the total value of all shares in the company. For example, if the profit is $10 million for the period, and the total cost for the shareholders in the share capital of the company is $100 million, the return on equity will be equal to 10% ($10 million divided by $100 million).

There are a number of different figures from the statement of profit and loss and a balance sheet that people can use to get some different eggs. The usual method is to take net income from income statement divided by total equity on the balance sheet. If the company has a net profit of $50,000 on the basis of the statement of income in a given year, and recorded total share capital in the amount of $100,000 on the balance in the same year, then the calf is 50%. Some leading companies Usually have a ROE North of 30%.

The calculation of return on capital

Return to capital, in addition to using the value of a share of ownership in the company, and includes the total amount of debt of the company in the form of loans and bonds.

For example, if the profit is $10 million for the period, and the total cost for the shareholders in the share capital of the company is $100 million, and debts totaling $100 million, return on equity equal to 5% ($10 million divided by $200 million).

As with caviar, and the investor may use various figures of the balance sheet and the statement of profit and loss to get slightly different variations of the ROC. Ultimately, it is important that the investor uses the same calculation, over time, as this will reveal whether the company to improve, remain at the same level, or decreased performance over time.

General method of calculation of the ROC should accept long-term debt from the balance and add it to total equity. Divide net income by total debt+capital. If the company has a net income of 50,000 of income in a given year, recorded total share capital of 100 000 on the balance in the same year, and had total debt in the amount of 65.000, ROC 30% (50,000 / 165,000). This is a very quick way to calculate the ROC, but only for very simple companies. If the company has rental obligations, it also must be considered. If a company has one-time revenues that are not useful for comparison in the ratio of year-to-year, they should be deducted. Additional methods of calculation of the ROC see return on capital employed.

ROC and roe are well-known and reliable criteria used by investors and institutions to decide between alternative investment options. Under all other equal conditions, the most seasoned investors prefer to invest in companies with high roe and ROC compared with low values.

Profitability of sales

Return on sales (ros) to another factor that often comes up when discussing roe and ROC.

Businesses and accountants, to measure ROS, to measure how well the profit is generated from sales.

Profitability of sales reflects operating performance. ROS is commonly called “net profit” or “operating profit margin”. The formulas used to create the ROS varies, but the standard equation is net income before interest and taxes divided by total sales.

By itself, ROS does not provide a lot of information, because it is a relative value. Knowing the value of 10% or 30% do not explain if the business is good or not, and ROS will vary in different industries.

To see if ROS is strong or weak, it must be comparable over time or between competitors. The most efficient companies generally have higher values of ROS in the industry.

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