Management Notes

Reference Notes for Management

Shareholders Equity – Financial Ratio Analysis | Financial Accounting

Shareholders Equity | Financial Ratio Analysis | Financial Accounting


The shareholder equity (SE) is the owner’s claim after subtracting total liabilities from total assets. If shareholder equity is positive, the company has enough assets to cover its liabilities, but if it is negative, the company’s liabilities exceed its assets. Dividends are paid to shareholders as dividends, and retained earnings are the percentage of net earnings that are not paid as dividends. Retained earnings are not to be confused with cash or other liquid assets.


Following are the various ratios that helps in Financial Analysis of Shareholders’ Equity.

Return on Assets

A company’s rate of return on total assets measures its ability to generate income from its assets for both its creditors and shareholders. Owners of the corporation’s shares who are creditors and expect the corporation to earn income. As assets are financed by creditors as well as owners, the real return on assets is the net earnings available to owners and interest to lenders. Thus, the true indicator of return on assets is net profit plus interest. Hence, the following formula should be used if interest has been given.



Return on total assets = (Net Profit After Tax + Interest) = Average Total Assets

The sum of interest expense and net income is the return to the two groups who finance a corporation and this is the numerator of the return on assets ratio. The denominator is average total assets.


Return on Equity

Rate of return on common shareholders’ equity, often called return on equity, shows the relationship between net income and average common shareholders equity. Return on equity is computed only on common shares because the return to preferred shareholders 1s their specified dividend. This ratio shows relationship between net income and common shareholders investment the company how much income is earned for Re. 1 invested. It is also called return on equity. This ratio measures the relationship between earning available to equity shareholders and equity shareholder’s funds. It finds out how efficiently the funds supplied by the equity shareholders have been used.



Return on common shareholders equity ratio = ( Net profit after tax –  Preferred dividend) / Average common shareholders equity


Earnings available to equity shareholders (or NPAT preferred dividend) :The remaining amount after deducting preference dividend from net profit after tax is the earning available to equity shareholders.

Average equity or common shareholders’ fund: The remaining amount after deducting preference share capital from shareholder’s equity is the equity or common shareholders fund.


Earnings Per Share

Earnings per share is a measurement of the company’s per stare performance over a period of time to equity shareholders. It shows the profitability of the firm on per equity share basis . It is computed by dividing net income applicable to equity shares by the number of common share outstanding. The various classes of equity Share that a company might issue can be divided 
into one of two categories; (1) senior securities (preferred share): these securities nave a claim on net income ahead of the claim of common shareholders. (2) Common Share; the income figure used in the calculation of basic earnings per share is amount that remains after the claims of the senior securities have been deducted from net income.



Earnings per share = (Net profit after tax- preferred dividend)/ No. of Common stock outstanding 


No of equity shares outstanding: The total number of equity shares issued by a corporation less treasury Share


Dividend Per Share

It shows the relationship between total amount of dividend paid to equity shareholder and number of equity shares. It is computed to know the dividend distributed to common shareholders on per share basis.



Dividends per share = Amount of dividend to common shareholders / No. of common stock outstanding


No of equity shares outstanding: The total number of equity shares issued by a corporation less treasury Share.


Dividend Payout Ratio

This ratio ascertains the portion of dividend distributed out of the total earning in percentages. It establishes the relationship between dividends distributed to each share out of the earning available to each share.



Dividends payout ratio = Cash Dividend per share / Net income


Book Value per Share

The book value per share of common Share is the amount of owner’s equity of the company’s books tor each share of its share. if the company has only common share outstanding, its book value 1s computed by dividing total equity by number of shares or common outstanding. If the company has both common and preferred Share, Preference Share has a specified liquidation or redemption value. Book value per share of common is then then computed as follows:


Book value per share =  (Total stockholders’ equity- Preferred stock) /No of shares of common stock outstanding


Market Value Per Share

The market value per share 15 the price at which Share is currently selling. The issuing corporation’s net income, financial position, and future prospects and the general economic conditions determine market value. when Share is sold on share exchange, the price can be determined by its most recent selling price.


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