ROA vs ROCE Explained Simply: Key Differences, Formulas & Real Examples

You’re looking at a company. It’s profitable on paper. But is it actually using its assets wisely, or just getting lucky with numbers?

To answer that, we use:

ROA (Return on Assets)
ROCE (Return on Capital Employed)

These two metrics help you spot if a company is a tight operator - or just sitting on a pile of lazy assets.

ROA - Return on Assets

What does ROA mean?

ROA tells you:

“Out of everything this company owns - how much actual profit did it generate this year?”

This includes everything it owns: buildings, machines, inventory, cash, even land.
It checks if the company’s total asset base is being put to work.

Formula for ROA

ROA = Net Profit / Total Assets

• Net Profit: Profit after tax and interest (final bottom-line profit)
• Total Assets: Land, buildings, machinery, inventory, cash, and all other things the company owns

Example

• Net Profit: ₹200 crore
• Total Assets: ₹2,000 crore

ROA = 200 / 2000 = 10%

So this company earns ₹10 in net profit for every ₹100 worth of assets it owns.

ROCE - Return on Capital Employed

What does ROCE mean?

ROCE asks:

“How much operating profit did you earn from the capital actively being used in your business, not sitting idle?”

It excludes things like idle cash and temporary supplier credit. It focuses on productive capital.

Formula for ROCE

ROCE = EBIT / Capital Employed
where Capital Employed = Total Assets - Current Liabilities

• EBIT: Operating profit before interest and taxes
• Capital Employed: Only long-term, tied-up capital being used to generate profit

Example

• EBIT: ₹300 crore
• Total Assets: ₹2,000 crore
• Current Liabilities: ₹800 crore

Capital Employed = ₹2,000 - ₹800 = ₹1,200 crore

ROCE = 300 / 1200 = 25%

This means for every ₹100 of actual working capital, the company earns ₹25 in operating profit.

What Are Current Liabilities?

These are short-term obligations due within a year, like:

• Unpaid supplier bills (trade payables)
• Salaries
• Taxes
• Short-term loans

They are not your own money - they’re temporary credit. That’s why they’re removed in ROCE.

ROA vs ROCE - Summary Table

What Does It All Mean?

• High ROA : The company is using all its assets well
• High ROCE : The business core is very efficient
• High ROCE, Low ROA : Great operations, but too much unused stuff
• Low both : Weak, inefficient business
• High both : Strong, lean, well-run company

What If ROCE is High but ROA is Low?

This is a crucial red flag or missed opportunity - depending on how it’s handled.

What it means:

• The business engine (core operations) is running efficiently - strong ROCE.
• But the company is sitting on too many unproductive or idle assets - weak ROA. Examples: too much cash, unused land, or investments not earning proper returns.

Impact on business and share price:

• In the short term: Market may tolerate it if core business is strong.
• In the long term: If idle assets are not put to use, valuation may stagnate or drop.

Investors may say:

“This business makes money, but doesn’t know what to do with it.”

That’s when stock performance weakens, even with decent profits.

Real examples:

• HUL: Extremely efficient with capital (high ROCE), but has limited reinvestment opportunities - low ROA and slow share price growth.
• ITC: Earlier stuck in same trap, but now using its profits to build FMCG and new verticals - ROA is improving and share price is catching up.

The Fix:

Companies can correct this by:

• Paying higher dividends
• Doing buybacks
• Investing in new verticals or geographies
• Selling non-core assets

If they do nothing - they become “cash cows going nowhere.”

Final Take

• ROA : How well are you using all your stuff?
• ROCE : How much are you earning from the capital actually doing the work?

Together, they help you cut through the noise and see if the business is truly efficient - or just bloated and inefficient.