Return on Equity indicates how well a company is doing with the money it has now, whereas Return on Capital indicates how well it will do with further Capital.
Return on Equity consists of three main ingredients i.e. profitability, asset management, and financial leverage. Therefore, looking at the composite value of Return on Equity, the investors can get a fair idea of whether they will receive a good Return on Equity or not and also an idea of management's ability to get the job done. A high Return on Equity may be due to a high return on assets or a result of extensive use of debt financing or a combination of both.
Return on Capital on the other hand is a measure of how effectively a company uses its money (whether borrowed or owned), invested in its operations. It is also perceived as a distribution of cash resulting from depreciation, tax savings, the sale of capital assets or securities or any other transaction unrelated to the retained earnings. It is a ratio that indicates the efficiency and profitability of a company's capital investments. Return on Capital is calculated by dividing the profit before interest and taxes by the difference between total assets and total liabilities, to be precise, ROC= EBIT/Total assets- Total Liabilities. ROC should always be higher than the rate at which the company borrows at, otherwise any increase in borrowings will reduce shareholder's earnings.
Return on Equity indicates how well a company is doing with the money it has now whereas Return on Capital indicates how well it will do with further capital. However, Return on Equity gives a better idea of what a company can achieve with its profit and how fast its earnings are likely to grow. Of course, if long term debt is small, then there is little difference between the two ratios. If your data source does not give you Return on Capital for a company, then it is easy enough to calculate it from Return on Equity. Also there is no tax on Return on Capital.
