- Why profit alone says nothing until you know the capital behind it
- ROCE, ROE and ROIC — what each measures and when to use it
- Why a fixed deposit sets the floor for what counts as a good return
Two friends each made ₹5 lakh profit last year. Impressive?
The first invested ₹20 lakh in his business. The second invested ₹2 crore.
The first turned ₹20 lakh into ₹5 lakh — a 25% return. The second turned ₹2 crore into ₹5 lakh — a 2.5% return, less than a bank fixed deposit, with all the risk of running a business.
Identical profit. One is an outstanding business, the other is an expensive hobby. Profit means nothing until you divide it by the capital that produced it.
Return on capital is the closest thing fundamental analysis has to a single quality score. Great businesses earn a lot from a little; poor businesses consume a lot to earn a little.
The three returns
- EBIT
- operating profit — before interest and tax, so lenders and owners are treated alike
- Capital employed
- all the money in the business, whoever supplied it
- PAT
- net profit, after interest and tax
- Equity
- the owners' money in the business — capital plus reserves
- EBIT × (1 − tax)
- operating profit after tax, ignoring financing
- Invested capital
- equity plus debt, minus cash and non-operating assets
Using the P&L and balance sheet from Module 2.
- EBIT
- ₹63 Cr
- PAT
- ₹37.8 Cr
- Equity
- ₹160 Cr
- Total debt
- ₹138 Cr
- Cash
- ₹18 Cr
- Tax rate
- 25%
What counts as good? Start with the fixed deposit.
The floor is easy to set. A bank fixed deposit in India pays roughly 6–7% with essentially no risk. A government bond, similar. So a business that earns 8% on its capital is asking you to accept business risk for barely more than a risk-free return. That's not a business worth owning — it's a worse fixed deposit with extra steps.
- Above 25%Interpretation: Exceptional. Usually means a real moat — brand, network, or licence. Verify it's sustainable.
- 15–25%Interpretation: Good business. Comfortably above the cost of capital; growth creates value.
- 10–15%Interpretation: Average. Roughly around the cost of capital — growth is treading water.
- Below 10%Interpretation: Weak. Business risk taken for near-deposit returns.
- Below cost of capital, persistentlyInterpretation: Every rupee reinvested destroys value. Growth here is the problem, not the solution.
A company earning below its cost of capital gets worse as it grows. This is the most counter-intuitive idea in the module — growth is only good when returns are good.
Consistency beats a single brilliant year
ROCE each year. Both average about 18%.
- Company A
- 19, 18, 20, 17, 19, 18, 19, 18, 17, 19
- Company B
- 4, 42, 8, 31, 2, 38, 6, 29, 3, 27
An old, written-down asset base. A factory built in 1994 sits on the books at almost nothing. Divide profit by that tiny denominator and ROCE looks spectacular — but replacing that factory today would cost ten times its book value.
Aggressive leverage. High ROE with modest ROCE means the return is coming from borrowed money, not from the business. Always read the two together.
A one-off year. A single high-ROCE year in a cyclical business tells you where in the cycle you are, not how good the business is.
The defence is always the same: look at ten years, and read ROCE and ROE side by side.
For a bank, debt isn't a funding choice — deposits are the raw material. A bank is leveraged 8–12× by design, so "capital employed" and ROCE lose their meaning.
Banks and NBFCs are therefore judged on ROE and ROA (return on assets, where above ~1.5% is strong), alongside net interest margin and asset quality. Module 6 covers the sector lenses properly.
- ☐ROCE for ten years, not one — write down the range, not just the average.
- ☐Is ROCE comfortably above ~12% (the rough cost of capital)?
- ☐Is ROE much higher than ROCE? If so, debt is doing the work — go check the debt.
- ☐Is the asset base old and written down, flattering the denominator?
- ☐Is the company reinvesting at these returns, or hoarding cash it can't deploy?
See it live · Return ratios are a scoring pillar in every fundamental report here, judged against the company's own sector rather than a single global benchmark.
See the pillars →In one screen
- 1Profit is meaningless without the capital that produced it.
- 2ROCE judges the business; ROE judges your money; ROIC vs cost of capital judges whether growth creates value.
- 3A fixed deposit sets the floor — below ~12% ROCE, you're taking risk for little reward.
- 4Ten years of consistent ROCE beats one spectacular year.
- 5ROE far above ROCE means leverage, not quality.
Check yourself
Nothing is scored or stored — the explanation after each answer is the point.
Company X: ROCE 14%, ROE 34%. What does that gap tell you?
A company earns 8% ROCE and reinvests all its profits to grow 20% a year. What is happening?