This is a comprehensive tutorial on Return on Owners Equity. You will learn precisely what Return on Owners Equity is, how to calculate it, and how to interpret the results. Using the Colgate Case Study, we will also go over how to compute the Return on Owners Equity in Excel.
You can download the Colgate Return on Owners Equity template from this link – https://www.wallstreetmojo.com/ratio-analysis-template/
What is Return on Owners Equity?
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Return on Owners Equity is a profitability indicator that compares a company’s profits to its owner’s equity. Moreover, the return on owner’s equity is calculated solely on the common shareholder’s equity. Since preferred dividends and minority interests constitute a priority claim, they are subtracted from Net Income.
Formula
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Return on Owners Equity Formula = Net Income (after preferred dividends and minority interest) / Common Shareholder’s Equity
Interpretation
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– Because common shareholder’s equity is a year-end number, some analysts prefer to use average shareholder’s equity (average of beginning and year-end).
– ROE can be viewed as a profitability ratio from the perspective of a shareholder. This shows how much profit is earned through shareholder investments rather than the company’s overall asset investment.
– To have a better view of the company’s progress, ROE should be examined over a long period of time (5 to 10 years). Shareholders do not benefit directly from higher ROE. A higher ROE equals a higher stock price.
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