Return on Shareholders Equity HELP

GoldenRetreiver
GoldenRetreiver Registered Posts: 64 Regular contributor ⭐
in AAT Level 4 (Level 8 in Scotland)
Hi I have two formulas for this could someone please let me know which one is right. The Osborne book say Profit AFTER Tax/Ordinary shares + Reserves, the other one from college says Profit BEFORE Tax/ Ordinary shares + Reserves.

I thought it was Profit after Tax/Net assets, can you please help?

Comments

  • jimbob
    jimbob Registered Posts: 43 Regular contributor ⭐
    is this the same as the ROCE ratio
    if so its profits from ops/ capital employed
  • mehmet
    mehmet Registered Posts: 113 Dedicated contributor 🦉
    I would use the profit AFTER tax and interest, as this is the profit that shareholders are entitled to.

    If you look at the proforma for the Income statement, the bottom line (after interest, tax and discontinued ops) it is titled Profit for the period attributable to equity holders, and shareholders are the equity holders.
  • jimbob
    jimbob Registered Posts: 43 Regular contributor ⭐
    our college told us to never use a profit after tax and interest in any ratios
  • GoldenRetreiver
    GoldenRetreiver Registered Posts: 64 Regular contributor ⭐
    thanks I understand better now why we use profit after tax, thats more logical when you think about it.

    But please tell me what is the difference between;
    Capital Employed
    Net Assets
    And are share capital and ordinary shares + reserves the same thing?
  • Maybes
    Maybes Registered Posts: 8 New contributor 🐸
    Capital Employed is Total Assets - Current Liabilites

    Net Assets= Non current assets + current assets - current liabilities - non current liabilities (long term)

    I think.
  • definite.studies
    definite.studies Registered Posts: 88 Regular contributor ⭐
    jimbob wrote: »
    our college told us to never use a profit after tax and interest in any ratios

    That can't be right as profit after tax is also used in Earnings per Share, as well as Return on Net Assets (equals Return on Equity). This is the profit that is left for potential distribution to the shareholders after the payment of tax and loan interest.
  • mehmet
    mehmet Registered Posts: 113 Dedicated contributor 🦉
    GoldenRetreiver wrote: »
    But please tell me what is the difference between;
    Capital Employed
    Net Assets

    Check my last post in the DFS thread (http://aat.org.uk/forums/showthread.php?t=18323&page=5) about the difference between Equity (which is equal to Net Assets) and Capital Employed.
    GoldenRetreiver wrote: »
    And are share capital and ordinary shares + reserves the same thing?

    Share Capital will be the number of shares issued to shareholders. The Share Capital a/c will be the share capital multiplied by the nominal value of the shares.

    I'm not quite sure what you mean by Ordinary Shares + Reserves.
  • GoldenRetreiver
    GoldenRetreiver Registered Posts: 64 Regular contributor ⭐
    Hi I was going off the Osborne book - i think they mean just equity from bottom of the balance sheet, however, if I understand you ROSC should be Profit after Tax/Equity & Non current liabilites
  • mehmet
    mehmet Registered Posts: 113 Dedicated contributor 🦉
    No. It is Profit after Tax/Equity.

    ROSE looks at the return for the ordinary shareholders. So it looks at the return (Profit after Tax) the company is making on their funds, which will be the equity of the business.

    As far as the ordinary shares and reserves goes, Osbourne are saying that the shareholders equity is the value of the ordinary shares (Share Capital a/c and Share Premium a/c) and the reserves.
  • GoldenRetreiver
    GoldenRetreiver Registered Posts: 64 Regular contributor ⭐
    Mehmet, many thanks you've been a great help to me (shame you cant sit tomorrows exam for me instead!!!!)
  • mehmet
    mehmet Registered Posts: 113 Dedicated contributor 🦉
    I also have my own one to sit.

    I'm sure you'll do fine anyway.

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