This video discusses the difference in calculating ROE (return on equity) versus ROCE (return on common equity).
Note that ROE (return on equity) is net income for the WHOLE company divided by average stockholders’ equity, with the latter including all sources of equity (common equity, preferred equity, equity of noncontrolling interests).
ROCE (return on common equity), on the other hand, is net income attributable to COMMON shareholders only (net income – income attributable to noncontrolling interests – preferred dividends) divided by average common equity, with the latter only including common equity (stockholders’ equity –equity of noncontrolling interests – preferred equity).
Thus, ROE and ROCE differ in that ROCE excludes the return and equity related to preferred shareholders and noncontrolling interests and ONLY focuses on the return and equity related to common shareholders.
Hypothetically, if a company had NO noncontrolling interests or preferred stock, then its ROE would be the same as its ROCE.
So which one should you use?
If you’re wanting to know how good a job the company did generating profit specifically from the perspective of a common shareholder, then you should use ROCE.
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