Take the ROCE road to bypass debt - Intelligent Investor

Take the ROCE road to bypass debt - Intelligent Investor

How do you tell a good company from a bad one? It’s a fundamental question every investor must come to grips with and there’s no easy answer because each company is different. However, if asked to nominate just one financial ratio, many would select return on equity, or ROE as it’s commonly abbreviated.

We looked at ROE and its stablemate, return on capital employed (ROCE), in the second of a three-part series on ‘corporate metabolism’ starting in issue 169. Both can be indicators of economic strength. A company with a high return on its invested capital is more likely to generate better returns for its owners. Generally speaking, that’s because it will require less capital to maintain or grow its business.