A profitability ratio that relates the return from an entity’s common equity (CE) to the amount paid against ownership (holding) of such equity. In other words, it is the return that common equity holders/ investors receive on their investment in an entity by means of common shareholding. This financial ratio is used to assess an entity’s profitability and capital efficiency (how efficient it is in deployment of its capital).
Primary ratio (also, return on common equity (ROCE) ratio) is calculated using the below formula:
Where: return is measured as earnings before interest and tax (EBIT), and common equity is capital employed.
This ratio is an instrumental measure for comparing the relative profitability of an entity- i.e., in relation to the amount of capital used.
