Can someone explain the difference between ROE and profit growth?

General
1

Can someone explain the difference between ROE and profit growth? I’ve seen some stocks with a high ROE or ROCE (in the case of debt), but negative profit growth (example: Lux Industries shares). How can a company have a very good ROCE but negative profit growth?

2

  • Return on Equity is Net Income (profitability) / Equity financing. Return on Capital Employed is Earnings Before Interest and Taxes / capital employed (total assets - current liabilities). Essentially profitability compared to capital employed in the company.

  • Profit growth is calculated by comparing profits (revenue - costs) across years.

While ROE and ROCE can be higher based on the earnings compared with equity or capital employed - essentially capital efficiency. Profit growth might vary if costs while operating are higher due to operational inefficiency.

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3

Thanks. Why do most of them teach to look at ROC and ROCE instead of profit growth? Profit growth sounds more important to me.

4

I think ROE is after tax and not before tax as you have mentioned.

Meaning of Return on equity (ROE)- After Tax

It is the net income that the company receives after income taxes divided by the average amount of shareholders’ equity during the period of the net income

5

ROE, ROCE and Profit growth are almost similar in that they give us a sense of profitability of the company. While Profitability is helpful in understanding how well the company does operationally, ROE and ROCE helps investors compare capital efficiency while producing profits with other companies of similar sizes. Profit growth alone might not give a complete picture of the financials of a company.

6

ROE is Net Income (revenue - costs - interest - taxes) / Equity as I mentioned in the first reply. ROCE is what I mentioned as Earnings before Interest and Taxes / Capital employed.

7

ohk got it, thanks,

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8

I didn’t know ROE is after tax and ROCE is before tax. I had thought only difference between the two is debt is considered in case of ROCE

9

Sorry, but one more question. What is the difference between EBIT and ROCE? Are both same?

10

EBIT is essentially the earnings before Interest and Taxes. ROCE is a ratio of EBIT / Capital employed.

ROCE helps investors identify companies that are efficient with capital and the returns for dollars infused in the company.

How Useful Is ROCE as an Indicator of a Company's Performance?.

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11

ROE gives us an insight on how much returns owners are generating with their equity.

Profit growth includes how the company is doing overall

An investor focuses mainly on profit growth first and then looks at stuff like ROE whereas a business owner sees ROE first and profit growth later

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