The Impact of Return on Capital Employed (ROCE) on Market Valuation: An Empirical Analysis of India’s Automobile and Paint Industries

Return on Capital Employed (ROCE) is an essential metric for evaluating a company’s profitability and effectiveness in utilizing equity and debt. It gives investors and managers a holistic view of operational performance and the organization’s long-term sustainability. Companies with strong ROCE typically focus on strategic and operational efforts that enhance ROCE-related elements, such as productivity of fixed assets, efficiency in working capital, and robust operating margins. Although not often spotlighted in annual reports, companies with high ROCE metrics tend to align cross-functional targets to strengthen this measure. By examining the impact of ROCE, Earnings Per Share (EPS), and Dividend Ratio on stock prices of the Indian automobile and paint industries, both of which are significant to India’s economic growth, this paper aims to investigate whether ROCE affects stock prices directly. The analysis shows a low correlation between ROCE and stock prices, with EPS emerging as the primary variable through which ROCE indirectly influences share prices. While EPS is a function of ROCE and is affected by ROCE, this study suggests that ROCE should be assessed in conjunction with other financial indicators to understand its role in stock price movements better.