What is the difference between return on equity and return on capital?

Return on equity (ROE) and return on capital (ROC) measure very similar concepts, but with a slight difference in the underlying formulas. Both measures are used to decipher the profitability of a company based on the money it had to work with.

Calculating Return on Equity

Return on equity measures a company's profit as a percentage of the combined total worth of all ownership interests in the company. For example, if a company's profit equals $10 million for a period, and the total value of the shareholders' equity interests in the company equals $100 million, the return on equity would equal 10% ($10 million divided by $100 million).

Calculating Return on Capital

Return on capital, in addition to using the value of ownership interests in a company, also includes the total value of debts owed by the company in the form of loans and bonds.

For example, if a company's profit equals $10 million for a period, and the total value of the shareholders' equity interests in the company equals $100 million, and debts equal $100 million, the return on capital equals 5% ($10 million divided by $200 million).

Source : Investopedia