Return on Equity

System
System Posts: 100,534 🤖 Admin 🤖
edited 10:10AM in AAT student discussion
Hi

I was attempting the DFS June 2003 paper that is in the BPP book. Question 1.1 asks us to calculate some ratios and one of them is Return on Equity.

I have looked up Return on Equity in both my Osborne tutorial book and my BPP passcards and both say 'Profit after Tax/Shareholders Funds(or capital employed)'. However when I look at the answers in the book they state to use 'Profit before Tax and Interest'.

Does anyone know why this is?

Also different books seem to through around the terms:
Shareholders Funds
Captial Employed
Equity
What are the differences?

Thank you

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Return on Equity

    Those are all like terms but try this guide.

    Capital Employed is simply the amount of money invested by SHAREHOLDERS usually holding Ordinery and Preference shares.

    Ordinery shareholders are the Equity shareholders where as Preference shareholders are more or less creditors.

    If you like Equity will exclude Preference Shares BUT, Equity usually means ownership.

    Shareholders funds therefore is the sum of Ordinery and Preference Shares.

    Lastly as ROCE= Operating Profit/CEx100%
    Operating Profiting should be used in the Ratio calculation but if you use a different Profit figure make sure u STATE for the examiner to know which you use.

    Hope this helps
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Return on Equity

    Thanks for replying.

    I was okay calculating ROCE and then 'Return on Equity' completely through me!

    I think Capital Employed can include long term loans but equity doesn't.

    I will take another look using what you have told me.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Return on Equity


    Yes, you are right that Capital Employed includes long term loans.
    Using the Equation

    Assets-liabilities=Capital, Furthermore,
    Fixed Assets+Current Assets-Current Liabilities=Capital+Long term Liabilities

    we can use either side of the Equation but always NOTE that each side doesnt include all Liabilities

    Again you are right to say Equity doesnt include Long term Liabilities (i.e Debenture Loans and Preference Shares).

    Do you know how i can learn Gearing Ratio. It confuses me so much because the formulae says Prior Charge Capital/Total Capital.
    Since they say prior charge capital includes preference shares and debentures and Total capital also includes them. Why not exclude them in the formulae.
    Please guide me !
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Return on Equity


    Yes, you are right that Capital Employed includes long term loans.
    Using the Equation

    Assets-liabilities=Capital, Furthermore,
    Fixed Assets+Current Assets-Current Liabilities=Capital+Long term Liabilities

    we can use either side of the Equation but always NOTE that each side doesnt include all Liabilities

    Again you are right to say Equity doesnt include Long term Liabilities (i.e Debenture Loans and Preference Shares).

    Do you know how i can learn Gearing Ratio. It confuses me so much because the formulae says Prior Charge Capital/Total Capital.
    Since they say prior charge capital includes preference shares and debentures and Total capital also includes them. Why not exclude them in the formulae.
    Please guide me !

Categories

Privacy Policy