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I know the formulae for ROCE & ROE but my question is this:
What is the logic behind using “profit before interest and tax” in numerator for ROCE
BUT
”net profit after paying out all expenses but before paying dividends” in the numerator for ROE?
Hi,
Good question.
The equity share holders and only entitled to the profit for the year, hence why we use net profits, i.e. after the distributions to the debt holders and before any dividend payments.
The capital employed by the business has been generated for both the equity holders and debt holder, hence why we use PBIT as both the interest due to the debt holders and dividends due to the equity shareholders will come from the PBIT.
Hope that clears it up for you.
Thanks
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