ROE vs ROCE – Know the difference between ROE & ROCE

ROE vs ROCE – Know the difference between ROE & ROCE

The two financial ratios, Return of Equity (ROE) and Return on Capital Employed (ROCE) are the important measures to calculate the company's operational efficiency. They are used together to determine the future performance of a company. ROE shows what a company earns for the stakeholders and equity contributors. To put it in simple words, ROE considers the net return on equity. On the other hand, many analysts use ROCE over ROE. This is because ROCE considers return to all the stakeholders and not specifically to the equity contributors. Therefore, using both of them together can help in determining whether a company’s stock is worth investing or not.

Let us first learn how ROE and ROCE are calculated.

Return on Equity Formula

Return on Equity is calculated using the following formula;

ROE = Net Income ÷ Shareholders’ Equity

In the above formula net income includes the income that the company has earned over the year minus all the expenses and costs. The income includes payouts made to the preferred stockholders but does not include the dividends to the common shareholders.

Higher ROE is considered beneficial for the company as it suggests that the company is using the funds efficiently towards the growth of the business and generating higher profits.

Return on Capital Employed Formula

Return on capital employed formula is as follows;

ROCE = Capital Employed ÷ EBIT

ROCE measures how efficiently a company uses the capital to generate additional profits. ROCE is very helpful when used for comparing companies within the same sector.

Let us now learn about the key difference between ROCE and ROE.

Difference Between ROCE And ROE

  • The ROE only calculates the net return on the equity of a company i.e. the return on the residual equity capital. On the other hand, ROCE calculates the return to all the stakeholders of a company that includes both debt and equity. ROCE majorly focuses on the long term debt program of a company that has a residual value of more than 1 year.
  • ROE considers the impact of leverage to determine what would be left for the shareholders of the company after servicing the debt. Return on equity assumes interest as a cost to the company. While on the other hand, ROCE has a different approach. It considers interest as returns. It focuses on the operational performance of the company and evaluates the measures to service the company’s debt and equity.
  • The main focus of ROE is the equity shareholders of the company and this often leads to over glorification of the return on assets of the company. Return on capital employed measures the efficiency at which the assets of the company are used. Therefore, it is a better indicator of capital utilization because here the capital is sum of equity and debt, which is equal to the total of the long term assets of the company on a balance sheet.
  • Higher ROCE is always better than higher ROE. This is because the equity shareholders have direct benefits when the ROCE increases. A company with high ROCE will be able to raise debt at better terms as compared to the competitors which will lead to cost of capital and cost of equity of the company going down.

The above mentioned are a few differences between ROCE and ROE. Let us now learn when to use ROE and when to use ROCE.

When to use ROE and When to use ROCE?

Return on equity measures how a company manages its funds internally. Like for example a company that has ROE of 85% will be considered to be performing really well. Here the most sensible thing a company can do is to retain its holding rather than paying dividends to the shareholders. This is because the company is making very efficient use of the capital available to it. Such companies are also on the radar of big investors because companies with higher ROE have the potential to generate a huge surplus and deliver good performance in the future.

Return on capital employed has EBIT as the numerator which means that the operating profits arrive after the adjustment of depreciation. So this means that ROCE factors in all the fixed asset investment of the business but not the cost of finance. Unlike ROE, ROCE considers the debt holders and lenders to the company. Therefore, the ROCE calculates the extent up to which the operating profits are covering the long term capital of the company.

Using ROE and ROCE Together

While making an analysis of a company, it is always good to use ROCE and ROE together. By doing so you get better insights into the company. When a company has ROCE higher than its ROE, it suggests that the company is making good use of its debt to reduce its cost of capital. Another way to interpret it would be that the company’s debt holders are getting higher rewards than its equity holders. The great investor Warren Buffet adds to the debate on ROE vs. ROCE. He says that companies should have both ROCE and ROE above the levels of 20%. According to him, both of them should be closer to each other and the large gap between the two is not good for any company.

Both ROE and ROCE are important to measure the performance of the company. The investors should always seek investment in companies that have stable ROCE and ROE numbers. If you are a beginner in the stock market and want to invest after learning ROE vs. ROCE, you can contact IndiaNivesh Ltd. Our team of experts deploys technological tools to find right companies for investment and create value for you.

Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."


Intraday Trading Stock Tips - How to Select Stocks for Intraday

Intraday trading is one of the most popular ways to make quick money on a regular basis. However, to be successful in intraday trading, you need to pick the right stocks to trade in. Wrong selection of stocks for trade can mean wrong trading decision as well as losses. Intraday traders are always in search of the best intraday stocks for today. Gaining market knowledge and researching a bit can go a long way in picking good stocks. To further assist you with intraday trading, we list down some of the intraday trading tips that would be useful to you in making profitable trades. Intraday Trading Tips Liquid Stock The first intraday trading tip is to pick those stocks for trade that are liquid in nature. Liquidity here means higher volume. Stocks with higher liquidity or volume provide greater opportunities to trade. When there is a higher volume in stock then large quantities of it can be purchased and sold without affecting its price significantly. Moreover, intraday trading is all about closing the position at the end of the day. This is possible only when you have sufficient buyers and sellers at different price levels. Liquidity in the stock depends on its quality, news flow and many other factors. Therefore, best stocks for intraday trading on NSE are those that have higher trading volumes. Avoid Volatile Stocks The stocks that have low trading volumes and expect some news flow are generally very volatile. It is very difficult to predict the share price movement in such shares. It is advisable to avoid such stocks because they continue to show signs of volatility even after the news flow is over. Never Trade Against the Trend Another important intraday trading tip is to always follow the trend of the market. Taking a trade in the direction of the market will give you good results most of the time. When the markets are going high, the best intraday stock tip is to go long in the stocks and when the market is in the bear phase, it is advisable to go short in the stocks. Put Stop Loss To become a successful intraday trader you must always put a stop loss in your trade. Market does not always function as per your expectation. You might have thought that the coming days will see a bull market but the actual scenario turns out to be exactly opposite of it. In such scenarios, stop loss comes handy as it squares off your position when a particular price level is triggered. Stop loss acts as safety against huge losses and saves your capital by closing your trade at minimum losses. Hence, you must always put a stop loss in place for all of your intraday trades. If you are a beginner in the stock market, you can set your stop loss at a 3:1 reward to risk ratio. This means that your stop loss should be three times lower the price at which you are ready to book the profit. Timely Book Profit The intraday traders get the benefit of high leverage and margins. This helps them to take big trades and make larger profits. Here the key to success is to not get greedy when the targets are achieved in a stock. Once the target is hit, you must book profits instead of holding it with a hope that the stock would rise further. However, in some special circumstances, the stock price movement can be strong and it can go further up, in such cases you can adjust your stop loss. Determine the Entry and Exit Price You can be successful in intraday trading if you know at what price you would purchase and sell a stock. This is because, during intraday trading, price movements are very fast and your mind can immediately change if you do not have predetermined levels in your mind. Therefore, before taking a trade make sure you know the entry and exit price. Do Not Take Trade to Next Day Intraday trading is all about closing your open positions by the end of the trading session. However, sometimes when your price targets are not met, you might be tempted to take delivery of stocks and take the position to the next day. This is not a good strategy because you took the trade on the basis of intraday market trends and technical levels of that stock on a particular day. There is always a possibility of a trend change on the next day and your trade turning bad. Therefore, it is always advisable to close all the intraday positions on the same day. Research Another intraday stock tip to become a successful trader is to keep researching for a set of stocks that you would like to trade. Study the support and resistance levels of the stocks along with the technical levels. Also, find out which stocks have events lined up ahead and can see good price movements. This would enable you to take the trades confidently and help you earn higher profits.   The above mentioned are a few intraday trading tips that would help you in becoming a better trader. If you are a beginner, you must understand that trading is an art and you would learn it with time. Never take trades in a hurry. However, if you want any assistance regarding intraday trading, you can open a demat account with IndiaNivesh Ltd. We regularly update our clients with picks in the form of best intraday stocks for today. Moreover, these stock market tips for intraday are free.Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."

read more


Stock Market Volatility – Six Ways to Handle Stock Market Volatility

A famous saying by Warren Buffett is, “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” While you participate in the stock market, one thing that you cannot escape from is market swing. The stock market is one investment avenue where the fluctuation in the prices of securities can be sudden and big. Stock market volatility makes investing in the stock even more interesting and tricky. Volatility is basically changed in the Nifty or Sensex or stock prices going up or down. The extent of volatility is what matters most to the people in the stock market. Higher the movement in the stock, greater is the volatility. Therefore, it becomes very important for traders and investors to handle volatility carefully. In this article, you will learn six ways to handle stock market volatility. Six Ways To Handle Share Market Volatility Stick To Your Financial Plan You must ensure that stock market volatility does not affect your financial plans. Market volatility is for short term and your financial plans are for long term. Therefore, you must know how to manage different types of market conditions. You must always remember that volatility shall not last forever and you must stop worrying about the daily moves in the market. Stock markets are known for creating a huge wealth in the long term i.e. 10 to 15 years and short term volatility or daily volatility of stock should not make you change your financial plans.  Invest on a Consistent Basis When there is stock market volatility in index and stock prices are consistently going down, it is the best time to invest. Investing on a consistent basis in the share market is the key to success in the long term. Sitting on the side-lines and waiting for the market to fall further to make a purchase at a lower price is not the right thing to do in a volatile market. This is because when markets are volatile, it is impossible to predict the next move. By continuously purchasing in all the types of markets, you can get shares of good companies at a very cheap rate. Historically, it has been seen that investment made when the markets are volatile and at lower levels has given astonishing returns to the shareholders in the long term. Focus on Quality It has been seen that during stock market volatility, quality stocks perform much better. Good stocks are less volatile because they have good brand name. Their robust business model and continuous demand for their products help them perform better even in the bear markets. Therefore, you must focus on investing in stocks of good companies. You must also remember that overexposing your portfolio to high beta mid and small caps in volatile market can go against you. Therefore, it is always advisable to take exposure in good and quality stocks when there is share market volatility. Doing Nothing It may sound strange but doing nothing when there is stock market volatility in index is one of the best strategies. This is because investors often make bad decisions at such times. They begin to churn off their portfolio and end up making huge losses. No one can time the market correctly, so doing nothing when the market turns against you is the right thing to do. Phased Approach When the markets are volatile, you never know the right level to purchase the stocks. This is because the stock price can further go down after you make a purchase. Therefore, in such stock market volatility, the phased approach is the best approach to follow. In this approach, you can keep purchasing the stocks at different lower levels in a phased manner. The rupee cost average (RCA) will help you in lowering the average price of investment and give you the best purchase price for the long term. The phased approach is also useful in averaging the price of stocks that were purchased by you at a higher price when the market was not volatile. Therefore, the phased approach will help in enhancing your returns and handling the daily volatility of stocks is a better manner. Diversify A well-diversified portfolio is always the safest way to tackle stock market volatility. Make a portfolio that is a mix of stocks, short term investments, bonds, etc. The selection of the asset class must be based on your long term financial goals, current financial situation, time period and risk-taking ability. A diversified portfolio will always have the potential to give you good returns even in an unstable market. In fact, it is advisable to always make a diversified portfolio in the long run, to safeguard your capital and earn higher returns.   Other Ways To Handle Stock Market Volatility It has been seen that gold is a better performer when the markets are volatile. Gold prices tend to go up when there is global uncertainty, war or financial crisis. Gold prices also shoot up when the equity market turns volatile. During such times you can allocate 5% to 10% of your portfolio to gold. Gold will handle the market volatility well and enhance the value of your portfolio. The Bottom Line The above mentioned are six ways to handle stock market volatility. An investor in the stock market must know that volatility is a part and parcel of the markets. It is your ability to manage the risks that will determine how much return you will make in the stock market. Following a goal-based approach is one of the best strategies in the market. However, if you are new to the market or want any help during share market volatility, you can contact IndiaNivesh Ltd. We have a deep understanding of the financial market and we offer expert services with a personalised approach to create value for you.Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."

read more

Are you Investment ready?

*All fields are mandatory

related stories view all

  • IPO Process - 5 Steps for Successful Listing in India

    The last two years have proven to be very fruitful for the IPO (Initial Public Offer) market. Investors have cashed in the opportunity and made huge returns in the IPO. The journey of the company to offer its shares to the public is exciting and at the same time, it also offers an opportunity to the investors to reap the benefits of IPO. Seeing the performance of recent IPOs, the attention of investors towards it is at an all-time high and they are always on a lookout for the new opportunities to arrive. When a private company decides to go public, the initial public offering process starts. The companies go public to raise a huge amount of capital in the exchange of securities. An IPO is an important stage for the growth of any company because they have access to public capital which enhances their credibility and exposure. The initial public offering process in India is regulated by the ‘Securities and Exchange Board of India (SEBI). In this article, you will learn about 5 steps of the IPO process for a successful listing on the Indian stock exchange. IPO Process in India Step 1: Selection of an Investment Banker for Underwriting Process Before understanding the IPO process, let us understand what underwriting is. Underwriting is a process in which the shares of the companies are issued and sold during the initial public offering. During this process investment bank advices and gives suggestions to the company against a fee. The investment banker understands the financial situation of the company and accordingly suggests them plans to meet their financial needs. They sign an underwriting agreement with the company. The agreement has all the details about the deal and the amount that will be raised by issuing securities. The companies may select an investment bank after determining various factors such as the reputation of the bank, expertise in the process, quality of their equity research and experience in the sector they deal. All these factors help in selling the IPO to the investors, traders and retailers. Step 2: Due Diligence and Regulation Process After the selection of the investment banker, the company is required to make an initial registration statement as per the regulations of the SEBI. In this process, the company and the underwriters submit the SEBI its fiscal data and the future plans of the company. The company is also required to give the declaration about the usage of funds that will be raised from IPO procedure. This declaration ensures that the company has given each and every disclosure that an investor must know. The company must file various versions of the prospectus from the initial stage to the final stage with the investors. The prospectus consists of the company’s details like valuation of the company, risk and rewards of the investment along with other details. This IPO process ends with the filing of the above-mentioned documents. Step 3: Pricing The final price of the Initial Public Offering is determined by the investors. The investment bank markets the IPO. To attract the public to the IPO application process, they are priced at a discount. By issuing shares at discount, the share performs well when they are listed on the stock exchanges. The price of the stock during IPO procedure can be a fixed price with the price mentioned in the order document. On the other hand, a book building issue will have a price band within the bids that can be made by the investor. Step 4: Stock Listing and Price Stabilization When the shares of the company are listed on the stock exchange and trading begins, the investment bank takes measures to establish the price of the securities. When there are not enough buyers, the bank will purchase the shares. The role of the investment bank in stabilizing the share price is essential. However, one must remember that such buying would last only for a short period of time because the IPO process already consumes a huge amount of capital investment. Step 5: Transition to Market Competition When the company's transition period to the normal competitive environment is over, the company is required to make disclosures like its financial results, significant news, etc. that is material in nature and can affect the price of the shares. The role of the investment bank is still significant. It can continue as an advisor to the company and assist in increasing the price of the shares over a period of time.   Conclusion The above mentioned are the IPO process steps for a successful listing. An IPO can change the fortunes of the company and it can grow at a rapid pace. Apart from the company, investors can also reap the benefits of an IPO by investing in them. Since there are many risks and uncertainties associated with a company going public, good research before investment can be fruitful. The investors can compare the company with its peers and check its fundamentals before investing. An investor must also consider his risk appetite and availability of funds before investing money in the IPOs. If you are an investor and need any assistance regarding investing in the stock market, you can contact IndiaNivesh.Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."

    read more
  • IPO Allotment Status – All you need to know about IPO Allotment Process

    Initial Public Offerings have been in existence for a long time. But recently they have come under a lot of limelight. In the July-September period of last year, funds to the tune of USD 0.86 billion were raised from just 10 IPOs. And as per an EY report, IPOs are expected to gain more momentum in 2020. IPOs or Initial Public Offer are the buzzwords these days. Especially after the successful ones like IRCTC and Ujjivan Bank. Indian stock exchanges (BSE & NSE) ranked 6th worldwide in the highest number of IPOs in Quarter 3 of 2019. Read on to understand the IPO Allotment process in detail. Important aspects of bidding in an IPO Before we move to the allotment, we should know some important basics about IPO bidding. These days, most IPOs take the book building route. Some important terms to be aware of: Price Band Each IPO involves a price band. It is a price range within which applicants can make their IPO bids. The upper limit (or maximum price) is s the cap price. The lower limit of the price band is the floor price. The final issues price (known as the cut-off price) is decided based on the bids received.   Lots The total shares (on offer in the IPO) are divided into small lots. Each applicant needs to bid in these lots and not for individual shares. For instance, if a company intends to issue 1 lakh shares and the lot size is 20 shares per lot. Hence, the total number of lots on offer is 5,000. As per the SEBI guidelines, applicants cannot bid for shares quantity which is lower than the lot size. Also, bidding for lots in decimals (such as 1.5 lots) is not permitted. It is important to note that the lot size is applicable only at the stage of IPO allotment. Post listing, investors can trade their shares in the market in whatever quantity they want. ASBA ASBA stands for Application Supported by Blocked Amount. This facility lets you bid in IPOs without paying any money upfront. The amount remains blocked in the bank account and is deducted only after the allotment. IPO Allotment process Share allotment in an IPO needs to be done as per the SEBI guidelines. With the changes introduced by the regulator in 2012, all RII (Retail Institutional Investors) applications need to be treated equally. Some important points about IPO Allotment process: Only bids which are equal to or higher than the issue price qualify for allotment. Retail applicants (with qualified bids) need to be allotted the minimum application size, subject to stock availability in the aggregate. Apart from retail investors, there are two other types of investors in an IPO – QIB (Qualified Institutional Buyers) and NII (Non-Institutional Investors). Allotment to them is done on a proportionate basis. Post submission of all the bids, a computerised application is used to eliminate all invalid bids. This helps to identify the number of successful bids. There can be two situations –Under subscription (number of applications received is lesser than the total lot of shares offered) and Oversubscription (number of applications received is higher than the total lot of shares on offer). Allotment Rules for over and under subscription In case of an under subscription, every investor gets full allotment, regardless of the application size. For retail investors, in case of an IPO oversubscription, the max number of retail applicants eligible for allotment of the minimum bid lot is determined by using this formula – Total no. of shares available for RII (Retail Individual Investors) divided by Minimum Bid Lot. If the IPO is oversubscribed by a huge margin, the final allotment is done through a computerised lottery method. This would mean that some applicants will not get any allotment. If the oversubscription is not by a huge margin, then all applicants will get the minimum bid lot and the balance is proportionality allotted to applicants who had bid for multiple lots.   IPO Allotment Status IPO Allotment Status of each applicant gives the details regarding the number of shares applied for and final allocation in the IPO. The IPO status details are available online on the website of the registrar. Each IPO has a specific registrar such as Karvy, Linkintime, etc. Applicants can check their IPO allotment status by providing details such as PAN, IPO application number, etc. IPO Allotment Status Online is available within one week of the IPO closing date. The entire allocation process takes almost 10 business days. In the case of non-allotment within that period, the amount paid by the applicant is refunded back. The registrar also publishes an allotment document which has all the details regarding the IPO allotment such as the total number of applications received, IPO allotment calculations, etc.   Why were shares not allotted to you in the IPO? There can be three reasons for this. Invalid Bid Bids in an IPO can be rejected or considered invalid for numerous reasons. Some of these are invalid Demat or PAN details, incomplete information, multiple applications by the same person, etc.   Over Subscription Oversubscription means that the demand for the company’s shares exceeds the number of shares issued. In case of a hugely oversubscribed IPO, the shares are allotted based on a lottery. The rationale being that every applicant has an equal chance. If your name does not come up in the lucky draw, you will not be allotted the shares.   Bid Price is below the issue price IPOs following the book building route requires applicants to bid for lots as well as the price they are willing to pay. If the bid price you have submitted is less than the final issue price, you will not get any IPO allotments.   If you want to stay on top of the IPO game, a financial expert can be of great help. A partner like IndiaNivesh, who has more than 11 years of experience in the Indian markets, can keep you informed about all the upcoming IPOs and help you make the most of it.  Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."

    read more
  • Tax Saving FD – Know About Tax Saving Fixed Deposit

    Every salaried individual as well as a business person is required to pay taxes as per the income tax laws. While paying taxes, we all aim to legally save it in some way or the other. But how do we do that? It is the most confusing question for most of the taxpayers. One of the excellent ways of saving taxes is by investing in tax-saving investment schemes. They not only help you save taxes but are also instrumental in effectively achieving your financial goals. There are many investment avenues available in the market that either offer tax exemption or tax deduction. Having said that, selecting the most suitable and right tax-saving investments may not come easy for everyone. While choosing the right scheme, one needs to access several factors such as safety, returns and liquidity, among other things. A very popular tax-saving investment option among taxpayers is investments under section 80C. As per section 80C of the Income Tax Act, 1961, investments of up to Rs. 1.5 lakhs can be claimed as a deduction. Tax saving fixed deposit is a type of fixed deposit where you can get a deduction of maximum Rs. 1.5 lakhs under section 80C. To arrive at the net taxable income, the amount invested in tax saving FD is to be deducted from gross total income. Let us learn about some of the important points that you must consider before investing in tax saving FD. Things to Know About Tax Saving Fixed Deposit Investment in tax saving FD can be done by individuals and Hindu Undivided Family (HUF) only. The minimum amount for fixed deposits varies from bank to bank. Income tax saving FD has a lock-in period of 5 years. You cannot make premature withdrawals and loans against these FDs. Investment in these FDs can be made only through private or public sector banks. Rural and co-operative banks are not eligible for these FDs. Tax-saving fixed deposits can be held in ‘singly' or 'jointly'. When the holding is in joint mode, the tax benefit is available to the first holder. Tax saving FD interest rates vary from bank to bank. The interest rate ranges from 5.5% – 7.75%. However, note that some banks offer higher rates on FDs to the senior citizens. These fixed deposits have nomination facilities. The interest earned on the income tax saving FD is taxable according to the investor’s tax bracket. The interest on tax saving FD is payable on a monthly or quarterly basis. The main advantage of investing in tax saving fixed deposits is that they are less risky in comparison to equities. Since many banks offer this type of FD, let us learn about its details. Banks and Income Tax Saving FDs SBI Tax Saving FD Tax saving FD interest rates of SBI is 6.25% for general customers and 6.75% for senior citizens. The maximum deposit in a year is Rs. 1 lakh and the minimum deposit is Rs. 1,000. By using a tax saving FD calculator you can know the amount receivable after the lock-in period of 5 years depending on the maturity period of your FD.   HDFC Bank Tax Saving FD Tax saving FD in the HDFC Bank can be opened with a minimum amount of Rs. 100. The maturity period of this FD is 10 years. Tax saving FD interest rates is 6.30%. Senior citizens get an added benefit of 50 basis points over general customers.   ICICI Bank Tax Saving FD The interest rate on tax saving fixed deposits at the ICICI Bank to the general customers is 6.6% and for senior citizens, the interest rate is 7.10%. These rates are applicable to FDs having a maturity period of 5 to 10 years. The maximum amount that can be deposited is Rs. 1.5 lakhs and the minimum amount for opening tax saving FD at the ICICI Bank is Rs. 10,000.   PNB Tax Saving FD Punjab National Bank offers an interest rate of 6.30% on a five-year tax saving FD. The minimum amount for opening tax saving FD at the PNB Bank is Rs. 5,000.   Bank of Baroda Tax Saving FD Bank of Baroda offers an interest rate of 6.30% on a five-year tax saving FD.   The Bottom Line The above mentioned are the basic details about the major banks that offer income tax saving FDs. You may access each individual option carefully and select the suitable one after doing good research. You can find all the basic information on the bank’s website. If you want to find out the returns that you will be earning from the fixed deposit, you can access the tax saving FD calculator and find out the returns by entering your fixed deposit details. If you want to learn more about income tax saving FD or want to learn about other investment options, you can contact IndiaNivesh. We are among one of the most trusted and value-enhancing financial groups in India.Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."

    read more