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ROC vs. ROE

November 27 2005 at 6:51 PM
StevenEspi 

 
Larry,

In the IBD tables and other financial listings, I see Return on Equity. How does this differ from the Return on Capital that you calculate?

Thanks,
Steve

 
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AuthorReply

Re: ROC vs. ROE

November 27 2005, 7:48 PM 

I'm looking for a measure of what kind of return the owners are getting from what they have invested in the business. So I'm interested in working capital, which is a good measure of how much the business has to operate on, and capital (fixed) assets, which is land, buiding, and equipment that the business has invested in to grow the business. I get that from ROC.

The problem with ROE is that it simply looks at equity, which is total assets minus total liabilities. So changes in debt structure from period to period can distort the number. Also, it considers all assets, including intangible assets that really have nothing to do with a return on what is invested in the busines.

Of course, if the business has very little in the way of debt or intangible assets there won't be much difference between ROC and ROE.

Larry

 
 
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