BQLearning: What Are Return Ratios?
BQLearning is a show that seeks to demystify financial markets, economic theories, legal processes and political structures. This series focuses on financial market jargon.
Return ratios represent a company’s ability to generate returns for its shareholders. Both return on equity (ROE) and return on capital employed (ROCE) are ratios used to measure the efficiency with which a company can generate profits.
Return on capital employed measures the efficiency with which a company can employ its capital – both debt and equity. A high ROCE shows evidence of efficient use of capital.
Anupam Gupta, independent consultant at Aavan Research, explains how ROE and ROCE are calculated and why these are the most important parameters in understanding a business.