RETURN ON INVESTMENT
ROI compares the profits of an investment compared to the cost of the investment to determine gains.
RETURN ON CAPITAL EMPLOYED
ROCE looks at earnings before interest and taxes (EBIT) compared to capital employed to determine how efficiently a firm uses capital to generate earnings.
RETURN ON EQUITY
Return on equity (ROE) is a measure of financial performance calculated by dividing Profit after Tax by shareholders’ fund.
ROI is from investor’s perspective. If I invest in a share at ā¹100 in 2019 and it becomes ā¹110 in 2020 then my ROI is 10%. ROI can also mean the return from a project. The IRR of a project can be taken as the ROI from the project. However if the company had raised ā¹50 only and earned ā¹10 on that then its ROCE becomes 20%
ROI measures how good an investment is
ROCE measures how well the company utilises its capital employed
Along with this you need to know the formulae
Difference between ROCE and ROE is that the former measures the return for equity shareholders, the latter measures return for capital employed as a whole (i.e. including debt)
For a debt free company, ROCE and ROE are the same.
ROE and ROCE are the ONLY calculations in Financial Management where you have to use book values of equity and debt and not market value. This is because book value of equity shows how much equity was initially raised plus any retained earnings – and this is the money actually deployed by equity shareholders, first by contributing capital then by reinvesting the income on that capital. Similarly book value of debt shows the amount initially raised along with accrued interest