The return on capital measures how effectively the business is able to use its capital. This capital can be raise through an IPO, private investment, savings as well as loans.The main difference between the return on equity and the return on capital is that the return on equity provides the analyst with how well the company is performing in terms of the monetary funds being generated from its operations, while the return on capital tends to provide how well the company would be able to perform with additional capital. “However, Return on Equity gives a better idea of what a company can achieve with its profit and how fast its earnings are likely to grow. Of course, if long term debt is small, then there is little difference between the two ratios. If your data source does not give you Return on Capital for a company, then it is easy enough to calculate it from Return on Equity. Also there is no tax on Return on Capital.” (Rajnish, 2002)
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