How to calculate return on shareholders funds?
How many ways there are to calculate ROSF (Return on Shareholders Funds)? Should I use the gross profit or profit before finance costs and taxation ?
I don’t think there is more than one way to calculate it (or at least I haven’t come across). The numerator has the net income which is basically the revenue generated after deducting all costs (including finance costs and taxes). In other words, it’s the net income that is available to be distributed to the shareholders.
The denominator has the shareholder funds but excludes reserves such as revaluation reserves etc. It’s basically the share capital plus the retained earnings. However, since the ratio gives the return on the ordinary shareholders, you need to deduct any preference shares. Therefore, the formula is
ROSF= (Net Income – Preference Shares)/(Share Capital + Retained Earnings)