The return on common stockholders’ equity is calculated by dividing the organization’s net income minus preferred equity by common stockholders’ equity and multiplying by 100%. The number will show the percentage of assets that the owners returned after their investment.
The return on common shareholders’ equity is aimed to illustrate the financial success of a company. It is a tool that enables calculating organizations’ profitability. Such data is very influential in business since investors tend to choose companies with higher rates of return on equity. However, on the contrary to the calculation of return on equity, return on common stockholders’ equity formula includes only common shares. In such a way, it is possible to identify how successfully the company manages its processes aimed at returning the invested assets.
According to the return on common stockholders’ equity equation, the return on common equity is defined by the average shareholders’ equity, the deduction of preferred dividend, and net income. It identifies how much money a company generates using the invested common equity. The formula demonstrates the exact calculations that are needed to define the return on common stockholders’ equity ratio of a company.
For example, if a company’s net income is $300,000 and its preferred dividend is $80,000, while the average common stockholders equity is $2,000,000 than the calculations will be as follows:
$300,000 – $80,000 = $220,000
$220,000 / $2,000,000 = $0.11
This number suggests that each dollar of the invested common equity returns $0.11. To present this data in percentage, it is required to multiply the number by 100%.
$0.11 x 100% = 11%.