Tag Archives | return on capital employed

ROE (Return on Equity)

See Also:
Return On Equity Example
Return on Asset
Financial Leverage
Gross Profit Margin Ratio Analysis
Return on Equity Analysis
Fixed Asset Turnover Analysis

Return on Equity (ROE)

The return on equity, or ROE, is defined as the amount of profit or net income a company earns per investment dollar. It reveals how much profit a company earns with the money shareholders have invested. The investment dollars differ in that it only accounts for common shareholders. This is often beneficial because it allows companies and investors alike to see what sort of return the voting shareholders are getting, if preferred, and other types of shares that are not counted.

The term can be confusing as it has various aliases. For example, Return on Equity used to be called Return on Common Equity; however, ROCE now refers to Return on Capital Employed. Return on Equity is also the equivalent to Return on Net Worth (RONW).

Return on Equity Explanation (ROE) 

ROE is a measure of how well a company uses its investment dollars to generate profits; often times, it is more important to a shareholder than return on investment (ROI). It tells common stock investors how effectively their capital is being reinvested. For example, a company with high return on equity (ROE) is more successful in generating cash internally. Thus, investors are always looking for companies with high and growing returns on common equity. However, not all high ROE companies make good investments. Instead, the better benchmark is to compare a company’s return on common equity with its industry average. The higher the ratio, the better the company.

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Return on Equity (ROE) Formula

The return on equity formula is as follows:

ROE = Net Income (NI)/ Average Shareholder’s Equity

The Net Income accounts for the full fiscal year (prior to dividends paid to common stock holders and after dividends paid to preferred stock holders).

Find the average shareholder’s equity by combining the beginning common stock for the year, on the balance sheet, and the ending common stock value. Then divide these two values by two for the average amount in the year and do not include preferred shares.

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ROE

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Return on Capital Employed (ROCE)

See Also:
Return on Asset Analysis
Return on Equity Analysis
Financial Ratios
Return on Invested Capital (ROIC)
Current Ratio Analysis

Return on Capital Employed (ROCE) Definition

The return on capital employed ratio is used as a measurement between earnings, and the amount invested into a project or company.

Return on Capital Employed (ROCE) Meaning

The return on capital employed is very similar to the return on assets (ROA), but is slightly different in that it incorporates financing. Because of this the ROCE calculation is more meaningful than the ROA. The ROCE is generally used to find out how efficient and profitable a company is from year to year. As it is a percentage a company can locate problems or areas of improvement with the fluctuation of this ratio from year to year.

Return on Capital Employed (ROCE) Equation

The return on capital employed equation is as follows:

ROCE = EBIT or NI/(Total Assets – Current Liabilities)

Note: The earnings before interest and taxes, known as the operating income, is normally used, but people can also use the Net Income if they would like to incorporate the net interest and taxes into the ROCE formula.

Return on Capital Employed (ROCE) Example

Tim found that the ROCE last year is 16%. He would like to compare this number to the current ROCE. He begins by finding the following numbers in the Balance Sheet as well as the Income Statement:

Net Income = $50,000
Total Assets = $360,000
Current Liabilities = $35,000

ROCE = $50,000/($360,000 – $35,000) = 15%

Note: The drop in this number means that Tim’s company is not as efficient as it used to be or that it decreased it current liabilities.

return on capital employed

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