Most beginners start screening stocks by price — what's cheap, what's falling, what's hitting a high. But price tells you almost nothing about whether the underlying business is any good. Two ratios do a far better job of that, and professional investors lean on them constantly: Return on Equity (ROE) and Return on Capital Employed (ROCE).
Both answer a simple question: for every rupee put into this business, how much profit does it generate? A business that turns ₹100 of capital into ₹25 of profit every year is, all else equal, far better than one that turns ₹100 into ₹6. ROE and ROCE measure exactly this — just with a subtle and important difference between them. Let's build it up step by step.
What is Return on Equity (ROE)?
ROE measures how much profit a company generates on the money that belongs to its shareholders — the equity. It answers: if I, as a shareholder, have ₹100 invested in this company, how much profit is it earning on my ₹100 each year?
So if a company earns ₹20 crore of net profit on ₹100 crore of shareholders' equity, its ROE is 20%. Higher is generally better — it means the company is using shareholders' money efficiently to generate profit.
What counts as a good ROE in India?
As a working rule for Indian companies:
But there's a catch that trips up almost every beginner, and it's important enough to get its own section.
Why a high ROE can fool you
Look at the formula again: ROE divides profit by equity only. It completely ignores debt. This creates a loophole.
Imagine a company borrows a large amount of money. Borrowing doesn't increase shareholders' equity — debt isn't equity. So if that borrowed money generates profit, the profit goes up while the equity denominator stays roughly the same. The result: ROE shoots up, purely because the company took on debt — not because the business itself got any better.
A company can show a dazzling 30% ROE while being dangerously over-leveraged. The high ROE isn't a sign of quality — it's a side effect of heavy borrowing, and that debt is a hidden risk. This is why ROE should never be used alone.
This is exactly the problem that the second ratio — ROCE — was designed to solve.
What is Return on Capital Employed (ROCE)?
ROCE measures profit generated on all the capital a business uses — both shareholders' equity and borrowed money (debt). Because it includes debt in the denominator, the borrowing loophole disappears.
where Capital Employed = Total Assets − Current Liabilities
(or simply: Equity + Debt)
Note that ROCE uses EBIT (earnings before interest and tax — i.e. operating profit) rather than net profit. This is deliberate: it measures the profitability of the operations themselves, before the effect of how the company is financed. The result is a much cleaner read on whether the business — not the financial engineering — is genuinely good.
What counts as a good ROCE in India?
A high and stable ROCE over many years is one of the strongest signals that a company has a real competitive advantage — what investors call a "moat." It means competitors haven't been able to compete away its returns.
ROE vs ROCE: the difference that matters
Here's the simplest way to hold both in your head at once:
| ROE | ROCE | |
|---|---|---|
| Measures return on | Equity only | Equity + Debt |
| Profit figure used | Net profit (after interest & tax) | EBIT (operating profit) |
| Affected by debt? | Yes — debt inflates it | No — debt is included |
| Best for judging | Shareholder returns | Underlying business quality |
And here's the single most useful trick that combines them:
Compare ROE against ROCE. If ROE is much higher than ROCE, the company is using significant debt to boost shareholder returns — a yellow flag worth investigating. If ROE and ROCE are close together, the company is generating its returns with little reliance on debt — usually the mark of a financially healthy, high-quality business.
The one rule beginners ignore: consistency
A single year's ROE or ROCE means very little. A company can have one great year because of a one-off event — an asset sale, a tax benefit, a temporary demand spike. What you actually want is a business that earns high returns year after year.
So whenever you screen on these ratios, look at at least five years of history, not the latest annual number. A company with 18%, 19%, 17%, 20%, 18% ROCE over five years is far more trustworthy than one showing a single 28% spike surrounded by mediocre years. Durability beats a one-time high every time.
Always compare within the same sector
Different industries need vastly different amounts of capital, so their "normal" returns differ enormously. Comparing across sectors is meaningless and will lead you astray.
- Asset-light sectors — IT services, FMCG, branded consumer — naturally show very high ROE and ROCE (often 25%+), because they don't need much capital to operate.
- Capital-heavy sectors — infrastructure, power, metals, real estate — show structurally lower returns because they require enormous investment in plant and assets.
A 14% ROCE might be excellent for a power company but distinctly average for an FMCG business. Always benchmark a stock against its own sector peers, never against the whole market.
How to build a quality screen, step by step
Putting it all together, here's a sensible starting screen for finding fundamentally strong NSE companies:
- ROCE above 15% — filters for businesses that use all their capital efficiently.
- ROE above 15% — confirms shareholders are being rewarded too.
- 5-year average, not just the latest year — enforces consistency and filters out one-off spikes.
- ROE and ROCE reasonably close — avoids companies whose returns are propped up by heavy debt.
- Compare survivors within their sector — rank the shortlist against peers, not the market.
This single screen will already cut a 1,500-stock universe down to a much shorter list of genuinely well-run businesses — your starting point for deeper research, not a buy list in itself.
ROE and ROCE tell you about business quality, not whether the stock is cheap. A wonderful business at an absurd price can still be a poor investment. Use these ratios to build a watchlist of quality, then layer valuation (PE, PEG, fair value) on top before deciding anything.
Run this exact screen on 1,500+ NSE stocks
India Terminal lets you filter the entire NSE universe by ROE, ROCE, debt, growth and more — with 5-year history built in, so you can find consistently high-quality businesses in seconds instead of reading hundreds of annual reports. The dashboard and screener are free to use.
Open India Terminal →Frequently asked questions
What is a good ROE for Indian stocks?
For Indian companies, an ROE consistently above 15% is generally considered good, and above 20% sustained over five or more years is excellent. Consistency matters more than a single year — always look at ROE across at least five financial years rather than the latest annual figure alone.
What is the difference between ROE and ROCE?
ROE measures profit on shareholders' equity only, while ROCE measures operating profit on all capital employed — both equity and debt. Because ROE ignores debt, a company can inflate it simply by borrowing. ROCE removes that distortion, which is why many analysts trust it more for judging genuine business quality.
Why can a high ROE be misleading?
Heavy debt shrinks the equity base and inflates ROE, so a company that borrows aggressively can show a high ROE while actually being risky. Comparing ROE with ROCE exposes this: if ROE is far higher than ROCE, debt — not operational excellence — is doing the heavy lifting.
What ROCE is considered good in India?
A ROCE consistently above 15% is generally healthy for Indian companies, and above 20% sustained over several years points to a high-quality business with a durable advantage. As with ROE, multi-year consistency matters more than any single year, and ROCE should always be compared within the same sector.
Should ROE and ROCE be compared across sectors?
No. These ratios vary widely by sector because of differing capital needs. Asset-light businesses like IT or FMCG naturally show very high returns, while capital-heavy sectors like power or metals show lower ones. Always compare a company against its own sector peers, not the whole market.