1. Return on Capital Employed (ROCE): The Master Metric
ROCE measures how much operating profit (EBIT) a company generates for every rupee of total capital deployed in the business:$$\text{ROCE} = \frac{\text{Earnings Before Interest & Tax (EBIT)}}{\text{Total Capital Employed (Total Assets} - \text{Current Liabilities)}} \times 100$$
- Why it matters: ROCE accounts for both Equity and Debt. It prevents companies from hiding poor operating efficiency behind massive debt borrowing. - Benchmark: A high-quality Indian business should consistently deliver ROCE > 18% to 20% across economic cycles.
---
2. Return on Equity (ROE): The Shareholder Lens
ROE measures net income available to equity shareholders as a percentage of total shareholder equity (Net Worth):$$\text{ROE} = \frac{\text{Net Profit After Tax}}{\text{Shareholders' Equity}} \times 100$$
- The Debt Warning (DuPont Analysis): A company can artificially inflate its ROE by taking on dangerous amounts of debt. If ROE is 25% but ROCE is only 8%, the company is relying heavily on risky leverage rather than genuine operating efficiency.
---
3. Reinvestment Rate: How ROCE Compounds Wealth
When a company generates a 25% ROCE and reinvests 80% of its profits back into expanding stores, factories, or R&D at that same 25% rate: $$\text{Intrinsic Business Growth} = \text{ROCE} \times \text{Reinvestment Rate} = 25\% \times 80\% = \mathbf{20\% \text{ per annum!}}$$This mathematical compounding of intrinsic business value is what creates 50x and 100x multi-bagger stocks over 15-20 years (e.g. Titan, Pidilite, Page Industries).