You wouldn’t measure a ship by its sails alone—so why judge a business by equity returns in a capital-heavy world? For decades, Return on Equity (ROE) has been the darling of financial analysis, but in the industrial alleys and utility corridors of the market, ROE can flatter to deceive. Enter Return on Capital Employed (ROCE): the unsung hero that peels back the layers of leverage and asset intensity to reveal what’s really driving sector performance.

The Mirage of ROE: When High Returns Mislead

ROE is seductive. A single, crisp number that tells you how much profit a company wrings from each dollar of shareholder equity. But in asset-heavy sectors—think Utilities, Industrials, and Energy—ROE’s siren song can lead investors onto the rocks of misinterpretation. Why? Because ROE is easily juiced by leverage. Strip away equity with debt, and the number soars—even if the underlying business is treading water.

In Technology or Consumer sectors, where capital needs are light and growth is king, ROE still has its place. But when steel meets concrete, and factories stretch to the skyline, a subtler gauge is needed.

ROCE: The Real Operator’s Scoreboard

ROCE asks a tougher question: How well does this business deploy every dollar at its command, regardless of who owns it? It slices through the capital stack, measuring profits against the sum of equity and debt—total capital employed. In doing so, it holds management’s feet to the fire: are they earning enough to justify all the assets and liabilities on the balance sheet?

The formula is simple but profound: ROCE = EBIT / (Total Assets – Current Liabilities). Unlike ROE, there’s no place to hide behind clever financing or ephemeral one-offs. It’s the ultimate test of operational prowess, especially in sectors where capital isn’t just a tool, but the stage on which the business plays.

Industrials, Utilities, and the Capital Trap

Consider Utilities: Protected markets, steady cash flows, and gigantic infrastructure. Leverage is cheap and plentiful—so ROE shines. But look at ROCE, and you see the true cost of those power plants and transmission lines. A 10% ROE can mask a 4% ROCE—a warning sign that capital is being consumed, not compounded.

Industrials tell a similar story. The best operators squeeze every ounce of productivity from their assets. Here, ROCE separates the wheat from the chaff: the world-class manufacturer running lean and mean, versus the bloated legacy player surviving on borrowed time (and borrowed money).

Why Debt Distorts—and ROCE Defends

Here’s the kicker: as debt loads rise, ROE can soar—even as underlying returns stagnate. In asset-heavy sectors, managements can mask mediocre returns with financial engineering. But ROCE is immune to such tricks. It is the great equalizer, exposing whether new capital actually generates value, or just lines the pockets of creditors.

In asset-light sectors—think SaaS or luxury goods—ROCE and ROE often converge. But in asset-heavy sectors, the spread between the two is a silent alarm. The wider it gets, the more you should dig.

Sector Savvy: Using ROCE to See Around Corners

ROCE isn’t just a number—it’s a lens. In Utilities, a rising ROCE signals shrewd capital allocation, not just regulatory windfalls. In Industrials, it flags real productivity gains, not just cyclical tailwinds. In Energy, it separates the disciplined driller from the capital destroyer.

If you want to spot the next outperformer in a capital-intensive industry, look past the polished surface of ROE. Peer deeper, and let ROCE guide you to the companies truly creating value—not just borrowing it.

Final Thought: When the Lights Go Out, Who Still Shines?

In a world where debt is cheap and financial gimmickry is plenty, only the true return on all capital employed tells the real tale. Don’t let the dazzle of ROE blind you. In the end, the companies that master capital itself—measured by ROCE—are the ones still standing when the spotlight fades.

Because in capital-heavy sectors, it’s not about how fast you sail—it’s about how well you weather the storm.