Return on Shareholders Equity

This profitability ratio carries the relationship of return to the sources of funds yet another step further. While the ROCE expresses the profitability of a firm in relation to the funds supplied by the lenders and owners taken together; the return on shareholders equity measures exclusively the return on the owners funds.

The shareholders of a firm fall into two broad groups: preference shareholders and equity shareholders. The holders of preference shares enjoy a preference over equity shareholders in respect of receiving dividends. In other words, from the net profits available to the shareholders, the preference dividend is paid first and whatever remains belongs to the ordinary shareholders. The profitability ratios based on shareholders equity are termed as return on shareholders equity. There are several measures to calculate the return on shareholders equity: (i) Rate of return on (a) total shareholders equity and (b) equity of ordinary shareholders; (ii) earnings per share; (iii) dividends per share; (iv) dividend-pay-out ratio; (v) dividend and earnings yield; and (vi) price-earnings ratio.

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