Return on equity

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
i have just done Practice Paper 1 in the Isborne books and they asked for return on equity, which I have never heard of so assumed they ment ROCE. When checking the answers they want<BR><BR>Profit after tax, or intrest, up to you there are two answers/ capital employeed?<BR><BR>Is this a valid ratio or is Osborn being stange?<BR><BR>They use the same comments for this as i do with ROCE, but to me ROCE is operating profit ie before tan and interest/ capital employed.<BR><BR>Someone please help this has really confussed me, not that it takes much at the moment!

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    Return on equity

    Hi.<BR><BR>We have return on equity as "return on shareholders capital".<BR><BR>Profit on ordinary activities before taxation / Share capital & reserves (Share premium + revaluation reserve + retained profit)<BR><BR>Scott.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Return on equity

    This is an investment ratio<BR><BR>The total profit that could be distributed divided by the value of the shareholders funds<BR><BR>So look at profit AFTER tax
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Return on equity

    Yep found it in the book now, think I was just having a blond momnet, oh well best to get them outof the way today I guess!!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Return on equity

    <br><br><< <i>i have just done Practice Paper 1 in the Isborne books and they asked for return on equity, which I have never heard of so assumed they ment ROCE. When checking the answers they want<BR><BR>Profit after tax, or intrest, up to you there are two answers/ capital employeed?<BR></i> >><br><br><BR><BR>I just looked in my BPP book.<BR><BR>Return on Capital Employed is profit before interest and tax over capital employed (which is equity plus prior charge capital - loans, debentures, etc) expressed as a percentage.<BR><BR>Return on Equity is defined as profit _after_ tax less preference dividend if any, all over equity (_not_ including prior charge capital, this time), again expressed as a percentage.<BR><BR>Make any sense?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Return on equity

    It is a valid ratio, I've just come across it in the june 2003 paper.<BR>I also found a handout that says it's net profit after tax and pref dividends over ordinary shares and reserves.<BR>It indicates the return the company is making on the ordinary shareholders funds.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Return on equity

    Thank you Sandy,<BR><BR>I have looked it up and understand it now, I think I was just panicing earlier!<BR>
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Return on equity

    Hi,<BR><BR>Like Sandy said it is the profit available for distribution to the ordinary shareholders. In other words how much profit share ordinary shareholders will receive in dividends.<BR><BR>So <BR>PAT - preference shares(if any) / Equity (ordinary shares + reserves)

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