ROE

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Compare Retun on Equity (ROE) versus Return on Capital (ROIC)

Return on capital, also known as Return On Invested Capital (ROIC) is defined as:
NOPLAT / Invested Capital (usually expressed as a percentage)

Where:
NOPLAT = Net Operating Profit Less Adjusted Tax - used to normalize effects of company's capital structure. It's the net profit with a few costs backed out, cost of interest and depreciation (accrual accounting of capital expenditures).

When the ROIC is greater than the cost of capital (usually measured as weighted average cost of capital), the company is creating value. When it is less than the cost of capital, value is destroyed. The cost of capital is just one of many costs in a company, so a company that has a profit on its income statement must by definition be "creating value".
Both the ratios (ROE as well as ROIC) are important and tell you slightly different things. One way to think about them is that return on equity indicates how well a company is doing with the money it has now, whereas return on capital indicates how well it will do with further capital. If long-term debt is small, then there is little difference between the two ratios.

ROE ( Return on Equity):

The formula for calculating Return on Equity is:
Net Profit/ Shareholder's equity

Return on equity reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. A business that has a high return on equity is more likely to be one that is capable of generating cash internally. For the most part, the higher a company's return on equity compared to its industry, the better. This should be obvious to even the less-than-astute investor If you owned a business that had a net worth [shareholder's equity] of $100 million dollars and it made $5 million in profit, it would be earning 5% on your equity [$5 / $100 = .05, or 5%]. The higher you can get the "return" on your equity, in this case 5%, the better.

Return on equity is particularly important because it can help you cut through the garbage spieled out by most CEO's in their annual reports about, "achieving record earnings". Warren Buffett pointed out years ago that achieving higher earnings each year is an easy task. Why? Each ...