The return on common equity (ROE) measures the rate of return in stock-holders investment. It enables and individual to check whether the return made on an investment is better than other alternatives available. This is calculated by expressing (as a percentage of shareholders funds), net profit after tax, less dividend on preference stock and minority interest.
ROE =
Net income after tax – minority interest – dividend on preference stock
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Average shareholder’s equity
Excerpt from the financial statement of XYZ ltd. Is:
Net Profit after tax in 2006 and 2007 is 90 and 108 crores.
Minority interest in 2006 and 2007 is 9 and 18 crores.
Preference dividend in 2006 and 2007 is 20 and 20.
Share holders equity is 1,000 (2006) and 1,100 (2007) (including reserves and retained earnings).
The return on equity is :
70
----------------------------- = 6.67 X 100%
1/2 X (1,000 + 1,100)