Investor Corner/The asset classes/Equity Concepts
2.1.12 EPS, ROE, ROCE
EPS, ROE and ROCE are three of the most quoted company metrics. EPS shows profit per share; ROE shows how well shareholders' money is used; ROCE shows how efficiently the whole capital base is used.
Earnings per share
EPS divides a company's total profit by its number of outstanding shares, turning a large absolute profit figure into a per-share number that can be compared to the share price, which is exactly what feeds into the P/E ratio. Rising EPS over several years, rather than a single strong quarter, is generally the more meaningful signal.
Return on equity
ROE measures net profit as a percentage of shareholders' equity, answering how efficiently a company turns shareholders' own money into profit. A consistently high ROE across several years, achieved without excessive debt, is one of the more reliable signs of a well-run, financially disciplined business.
Return on capital employed
ROCE goes a step further than ROE by including both equity and debt in the denominator, measuring how efficiently a company uses its entire capital base, borrowed money included. This makes ROCE a fairer comparison between companies that finance themselves very differently, since a company loaded with cheap debt can show an inflated ROE that ROCE corrects for.
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