1 Answer
ROE is Net Earnings over Shareholders Equity. ROCE is Earnings before Interest and Tax over Capital Employed (Shareholders Equity plus Debt financing). Consider a zero debt situation. In this case the numerator of ROE has tax removed (and there is no interest) but the denominator will be the same (no debt) so the ROCE will be bigger. This situation persists until the amount of debt proportionally exceeds the addition of tax and interest to the numerator. My guess is this is the answer to your question in most cases.
The other possibility for a higher ROCE is where a company has a lot of cash and eliminates that from the denominator for the ROCE calculations because the cash is not financing the business, i.e. it is not employed. It is sitting in the he bank. However you can’t remove cash from an Equity calculation. It’s an important part of the equity of a business.
I would view ROCE as an indicator of the business performance where as ROE is a an indicator of the investment performance. So two businesses that are both performing to the same level may be more or less attractive to an investor based on the amount of cash or debt employed. It’s not as simple as saying that more debt is better for investors however. Debt adds risk to liquidity and cash adds opportunity (for acquisitions etc..).
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