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Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis

Return on Investment Ratios: ROI, ROCE, ROE, EPS and Dividend Payout

Updated 4 October 2026 · Fact-checked

Return on investment ratios measure profit earned against the money invested. The main ones are ROI, ROCE, ROE, EPS and dividend payout. To solve a question, pick the correct profit figure, pick the matching investment base, divide, multiply by 100 where a percentage is needed, then comment briefly.

Understand Return on Investment Ratios

Every business takes money from owners and lenders. Return on investment ratios tell you how much profit that money earned. A higher return, compared with past years or similar firms, usually means better use of funds.

The key skill is matching the profit to the investment. Profit before interest and tax (EBIT) belongs to all providers of long-term funds, so you compare it with capital employed. Profit after tax and preference dividend belongs only to equity shareholders, so you compare it with equity shareholders' funds.

ROI and ROCE look at the whole business. ROE looks at the owners only. The gap between ROCE and ROE comes from borrowing, but also from tax. If the firm earns more on borrowed funds than the interest it pays, leverage is favourable and ROE is higher than it would be without debt. Do not compare pre-tax ROCE directly with post-tax ROE. ROE can still be below ROCE even when leverage is favourable. For a like-for-like view, compare post-tax ROCE with ROE, or compare ROCE with the cost of debt.

EPS shows profit per equity share. Dividend payout shows what share of earnings goes out as dividend, and the rest is retained. Dividend per share and retention ratio come from the same numbers.

In ICAI-style questions, the base can be given in different ways. Capital employed can be built from the asset side or the liability side. Both must give the same answer, so use one as a check.

Key rules to remember

Return on Investment (ROI) / ROCE
ROCE = EBIT ÷ Capital Employed × 100
Pre-tax version. Some questions use EBIT × (1 − t) for a post-tax return. Follow the wording of the question. Use average capital employed if opening and closing figures are given.
Capital Employed (liability side)
Capital Employed = Equity Share Capital + Preference Share Capital + Reserves and Surplus + Long-term Debt (− fictitious assets, if any)
Equals Net Fixed Assets + Working Capital (Current Assets − Current Liabilities).
Capital Employed (asset side)
Capital Employed = Fixed Assets + Current Assets − Current Liabilities
Use as a cross-check. Non-trade investments may be added or excluded as the question directs.
Return on Equity (ROE)
ROE = (PAT − Preference Dividend) ÷ Equity Shareholders' Funds × 100
Equity shareholders' funds = equity share capital + reserves and surplus. Use average funds if asked.
Earnings Per Share (EPS)
EPS = (PAT − Preference Dividend) ÷ Number of Equity Shares
Use the weighted average number of shares if shares changed during the year.
Dividend Per Share (DPS)
DPS = Equity Dividend ÷ Number of Equity Shares
Paid out per share.
Dividend Payout Ratio
D/P = DPS ÷ EPS × 100 = Equity Dividend ÷ Earnings available to equity × 100
Retention ratio = 100% − payout ratio.
Return on Total Assets
ROA = PAT ÷ Total Assets × 100
Some books add back interest (after tax) in the numerator. State your version.

How to solve Return on Investment Ratios questions

Use this method for any return ratio question. It avoids the most common mismatch between profit and base.

  1. 1Read which ratio is asked and note whether a pre-tax or post-tax return is wanted.
  2. 2Build the profit figure: EBIT for ROCE, PAT less preference dividend for ROE and EPS.
  3. 3Build the investment base. For capital employed, add equity, reserves, preference capital and long-term debt. Subtract fictitious assets only if the question says so.
  4. 4Cross-check capital employed from the asset side: fixed assets plus current assets minus current liabilities.
  5. 5Check whether the question asks for average figures. If yes, take the mean of opening and closing balances.
  6. 6Divide and multiply by 100 for percentage ratios. Show every working line.
  7. 7Write one line of interpretation, such as comparing ROCE with the cost of borrowing or noting the retained share of earnings.

Quickest way: Match-the-pair method

When to use it: Use it when several return ratios are asked from one set of data and time is short.

  1. Write the three profit lines first: EBIT, PAT, and PAT less preference dividend.
  2. Write the two bases next: capital employed and equity shareholders' funds.
  3. Pair EBIT with capital employed. Pair earnings for equity with equity funds and with number of shares.
  4. For MCQs, eliminate options that mix a pre-interest profit with an equity-only base.
  5. Compute EPS first. DPS and payout then follow in one step each.
  6. In written answers, give the formula, the substituted numbers, the result and one line of comment. This earns step marks even if one figure is wrong.

Common mistakes in Return on Investment Ratios

  • Using PAT for ROCE.

    PAT is the profit figure students remember most.

    Fix: ROCE uses EBIT because capital employed includes debt. Interest is a return to lenders and must stay in the numerator.

  • Forgetting to deduct preference dividend in ROE and EPS.

    Students stop at PAT.

    Fix: Equity holders get only what is left after preference dividend. Always subtract it before dividing.

  • Including current liabilities twice or leaving out reserves in capital employed.

    The liability side and asset side get mixed.

    Fix: Build from one side, then verify with the other. Both must match.

  • Using total shares instead of weighted average shares for EPS.

    Mid-year issues or buybacks are overlooked.

    Fix: Weight new shares by the months outstanding, unless the question gives a simple share count.

  • Confusing payout with retention.

    Both use the same figures.

    Fix: Payout = dividend ÷ earnings. Retention = 1 − payout. Write the definition before calculating.

  • Not commenting on the result.

    Students treat the ratio as the final answer.

    Fix: Add one line: compare with the previous year, the industry, or the cost of debt.

Worked examples

Example 1

A company has: Equity share capital ₹10,00,000; Reserves ₹5,00,000; 10% Preference share capital ₹2,00,000; 12% Long-term debt ₹8,00,000. EBIT is ₹5,00,000. Interest is ₹96,000 and tax rate is 30%. Compute ROCE and ROE.

Show the solution
  1. Capital employed = 10,00,000 + 5,00,000 + 2,00,000 + 8,00,000 = ₹25,00,000.
  2. ROCE = 5,00,000 ÷ 25,00,000 × 100 = 20%.
  3. EBT = 5,00,000 − 96,000 = ₹4,04,000.
  4. Tax at 30% = ₹1,21,200. PAT = 4,04,000 − 1,21,200 = ₹2,82,800.
  5. Preference dividend = 10% of 2,00,000 = ₹20,000. Earnings for equity = 2,82,800 − 20,000 = ₹2,62,800.
  6. Equity shareholders' funds = 10,00,000 + 5,00,000 = ₹15,00,000.
  7. ROE = 2,62,800 ÷ 15,00,000 × 100 = 17.52%.

Answer: ROCE is 20% and ROE is 17.52%. ROE is lower mainly because ROCE is measured before tax, while ROE is measured after tax and preference dividend. Borrowing at 12% against a 20% pre-tax return still adds to the return on equity, so leverage is favourable.

Example 2

A company has 50,000 equity shares of ₹10 each. PAT is ₹6,00,000 and preference dividend is ₹50,000. Equity dividend declared is ₹2,75,000. Find EPS, DPS, dividend payout ratio and retention ratio.

Show the solution
  1. Earnings for equity = 6,00,000 − 50,000 = ₹5,50,000.
  2. EPS = 5,50,000 ÷ 50,000 = ₹11.
  3. DPS = 2,75,000 ÷ 50,000 = ₹5.50.
  4. Payout ratio = 5.50 ÷ 11 × 100 = 50%.
  5. Retention ratio = 100% − 50% = 50%.

Answer: EPS is ₹11, DPS is ₹5.50, payout is 50% and retention is 50%. The firm keeps ₹2,75,000 in the business.

Exam tips

  • Write the formula with its profit and base labelled before putting in numbers. Step marks depend on this.
  • If the question gives opening and closing balances, check whether it wants average capital employed. If unclear, state your assumption.
  • In MCQs, the quick check is: debt in the base means EBIT on top. Equity-only base means earnings for equity on top.
  • Practise one combined question that gives a balance sheet and profit statement and asks for ROCE, ROE and EPS together. This is how the topic often appears with ratio analysis.
  • Add a one-line comment on trend or comparison whenever the question says 'analyse' or 'comment'.

Practice questions from Financial Analysis and Planning - Ratio Analysis

Return on Investment Ratios in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Return on Investment Ratios: frequently asked questions

What is the difference between ROE and ROCE?

ROCE measures EBIT against all long-term capital, including debt. ROE measures earnings available to equity shareholders against their own funds only. When borrowed money earns more than it costs, ROE is higher than it would be without debt. Because ROCE is pre-tax and ROE is post-tax, ROE can still be below ROCE.

How do I calculate capital employed?

Add equity share capital, preference capital, reserves and long-term debt. You can also take fixed assets plus current assets minus current liabilities. Both routes should match, so use one to check the other.

Is ROI the same as ROCE?

In many CA Intermediate problems, ROI is treated as the return on capital employed, using EBIT over capital employed. Some questions use a post-tax version. Read the wording and state the formula you use.

How is dividend payout ratio linked to EPS?

Payout ratio is dividend per share divided by EPS, shown as a percentage. The balance of earnings is the retention ratio. So if you know any two of EPS, DPS and payout, you can find the third.