According to analysis of 312 large listed companies with market capitalisation above ₹10,000 crore and both ROE and ROCE above 12%, debt leverage significantly impacts return ratios. The study found that 91% of companies showed higher ROCE, the normal pattern, while only 9% or 28 companies demonstrated higher ROE. These high-ROE companies carried an average debt-to-equity ratio of 0.89 times, substantially higher than the 0.20 times for companies where ROCE led. As reported, debt functions similarly to seasoning in cooking - added in the right amount it enhances returns, but too much overpowers the overall performance.
The analysis identified 10 companies where three-year average ROE exceeded ROCE, with five companies in the Energy & Utilities sector. According to the report, Aegis Vopak Terminals led with a ROE of 21.9% versus ROCE of 12.3%, followed by Adani Power at 45% ROE versus 25.7% ROCE. Hindustan Petroleum Corporation showed 30.7% ROE versus 19.6% ROCE, while Schneider Electric Infrastructure achieved 59.6% ROE versus 39.4% ROCE. Energy & Utilities companies dominated the list due to their capital-heavy nature requiring large upfront investments in assets and infrastructure.
The analysis demonstrates how financial leverage works through a simple example: investing ₹100 in a business earning 20% returns produces ₹20 profit, while adding ₹100 of borrowed money at 8% interest generates ₹40 total profit, leaving ₹32 for shareholders after interest payments. As reported, this creates financial leverage where the company borrows at 8%, invests at 20%, and transfers the difference to shareholders. The company's ROCE remains unchanged at 20% on employed capital, while ROE increases significantly for shareholders.
Beyond debt leverage, other factors contribute to higher ROE including non-operating income from surplus cash, rent from spare property, or associate profits that add to net profit without affecting operating ROCE. According to the report, tax benefits can also influence ROE when companies recover from losses and book deferred tax credits. Suzlon Energy exemplified this through tax benefits that pushed PAT above profit before tax despite low borrowings. Additionally, a small equity base can inflate ROE when measured against reduced equity base due to years of losses eroding reserves.
The study emphasizes that a lower ROCE than ROE is normal and not a warning sign, as ROCE measures operating profit before interest while ROE reflects profit after tax and interest. As reported, when ROE exceeds ROCE, investors should examine whether the company uses debt efficiently or if ROE is being artificially inflated by non-operating income, tax credits, or small equity bases. The analysis suggests that while high returns indicate potential, understanding the underlying drivers determines sustainability over the long term, making ROE analysis suitable for value-minded investors rather than quick screens. Recent market data shows that companies like Genus Power, Titan Company, and Lumax Auto Technologies have successfully used debt as a growth accelerator while maintaining strong financial health and profitability metrics.
