1: This ratio should also be compared with the company’s peers and other industry players because in, industries with high profit, margins, like FMCG and pharmaceuticals, this number is generally higher, whereas in, capital-intensive businesses like airlines, utilities, or real estate, the number is commonly lower.

2. The company can manipulate ROE by using debt. Hence, along with ROE, you should also look at other leverage ratios like debt-to-equity ratios or interest coverage ratios so that you can get a complete idea of the business.

This ratio should be looked at not only for one point three times but also for a long-term series. If the ROE is continuously increasing it means that the company is utilizing its equity very well, whereas if the ROE is decreasing, it means that the management is investing the equity in unproductive assets.

4 As for investing, you should also look at the retained earnings of a company. Retained earnings mean that after deducting all the expenses, taxes, dividends, etc., whatever money is left is called written earnings. Therefore, if we look at the written earnings of a company for one year and the next year, the ROI of this company is seen increasing, which means that the company has generated new profit by using those written earnings for good projects.

5 Now you may ask what the difference is between ROCE and ROE. So in ROCE, we consider both the debt and equity of the company, whereas in ROE, only the equity is considered. On the other hand, the earnings we see in ROCE are earnings before interest and tax, whereas in ROE we only look at the net income. So, in summary, ROE tells us how well a company is generating a profit by utilizing its equity. But, by just looking at ROE, we cannot make our decision about which company to invest in because ROE does not tell us anything about the debt.