Confused "Return on Equity Ratio"

System
System Posts: 100,534 🤖 Admin 🤖
edited 10:08AM in AAT student discussion
I need help to clear the following:<BR><BR>is there any different between return on equity ratio and return on shareholders capital ratio "as I think they are the same".<BR><BR>what is the formula/s to calculate this/these ratio/s<BR><BR>in my book<BR><BR><BR>Return on shareholders capital= Profit before tax/capital & reserves<BR><BR>in the passcards<BR><BR>Return on equity= Profit after tax-preference/capital & reserves-preference<BR><BR>if they are the same ratio why the difference in formula.<BR><BR>please help, the exam is next week and I need to clear this matter.<BR><BR>appreciating your co-operation<BR><BR>best wishes and good luck everybody<BR><BR>hussain alasfoor<BR><BR>hussainalasfoor77@hotmail.com

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    Confused

    return on shareholders capital refers to all shares ( both ordinary and preference shares)<BR> while, return on shareholders equity refers to ordinary shares only( that's why the formular minus the prefrence shares.)<BR>Remember, that equity shares are ordinary shares and non-equity shares are preference shares.<BR>hope this has helped.Goodluck in the exams
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Confused

    Hi,<BR><BR>Thanks for your reply, but my real question was why we took the Profit before tax when calculating for return on shareholders capital and profit after tax when calculating for return on equity?<BR><BR><BR>regards,<BR><BR>hussain alasfoor<BR><BR><BR>
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Confused

    RoE looks at the return shareholders have earned from their investment (so we look at the profit available to them - which must be after any tax charges have been deducted)<BR><BR>RoCE looks at how well the managers have managed the investment in the business (shareholders' funds and long term loans) so interest charges or tax costs are outside their control and do not need to be taken off the profit
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Confused

    hi<BR><BR>Sorry you wrote"RoCE looks at how well the managers have managed the investment in the business (shareholders' funds and long term loans) so interest charges or tax costs are outside their control and do not need to be taken off the profit ", but my question abour ROSC not ROCE<BR><BR>please reply, because I'm more confused<BR><BR>regards,<BR><BR>hussain alasfoor
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Confused

    Quote:'Sorry you wrote"RoCE looks at how well the managers have managed the investment in the business (shareholders' funds and long term loans) so interest charges or tax costs are outside their control and do not need to be taken off the profit ", but my question abour ROSC not ROCE' Unquote<BR><BR><BR>I always understood ROCE was calculated on Profit Before Tax and Interest (basically, on net profit) and 'capital employed' includes loans as well as shareholders funds. <BR><BR>ROE is merely interested in after-tax profits and SH funds less preference shares and tells them how well their investment has performed.<BR><BR>The first is how well the CAPITAL (i.e., shares, debntures, preference shares) is working and the second how well the EQUITY (=another word for SHARES) is doing.<BR><BR>ROCE is of interest to current investors and ROE to potential ones. Just my 2p worth (+VAT)<BR>
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Confused

    hussainalasfoor77 I am treating this as a genuine query, but what you have written looks suspicious<BR><BR>Equity is the name given to Shareholders Funds - and Shareholders' Funds can also be called Shareholders' Capital<BR><BR>If you want to know what return your shareholders are getting from their investment then you must calulate this from the profit available for distribution to them - in other words the profit after taking out the tax and interest<BR><BR>So returning to your starting point, any formula that includes tax or interest in the profit value will not give a true value for the shareholders' return on their investment<BR><BR>As a final point, accountancy examiners are very well aware that different books can define the formula for a particular ratio in a different way<BR><BR>If you are to show that you understand ratio analysis then <BR>1 state the ratio<BR>2 state the formula in words<BR>3 show the calculation<BR>4show the value of the ratio<BR><BR><BR>sandy.hood@chichester.ac.uk
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Confused

    hi,<BR><BR>sorry for late reply, but I want to thank you all who replied, helped and share me with their valuable and useful information.<BR><BR>thanking you again and wish you a good luck in your exams.<BR><BR><BR>best ragards,<BR><BR>hussain alasfoor<BR>

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