return on common stockholders' equity

Examples of return on common stockholders' equity in the following topics:

• Relationships between ROA, ROE, and Growth

  • Return on assets is a component of return on equity, both of which can be used to calculate a company's rate of growth.
  • In review, return on equity measures the rate of return on the ownership interest (shareholders' equity) of common stockholders.
  • This is in contrast to return on equity, which measures a firm's efficiency at generating profits from every unit of shareholders' equity.
  • Return on assets is, however, a vital component of return on equity, being an indicator of how profitable a company is before leverage is considered.
  • In other words, return on assets makes up two-thirds of the DuPont equation measuring return on equity.

• Impacts of Financial Leverage

  • The use of financial leverage can positively - or negatively - impact a company's return on equity as a consequence of the increased level of risk.
  • Return on equity is the rate of return on the shareholders' equity of a company's common stock owners.
  • Return on equity shows how well a company uses investment funds to generate earnings growth.
  • However, if a company is financially over-leveraged a decrease in return on equity could occur.
  • If the risk of the investment outweighs the expected return, the value of a company's equity could decrease as stockholders believe it to be too risky.

• Accounting for Preferred Stock

  • All preferred stock is reported on the balance sheet in the stockholders' equity section and it appears first before any other stock.
  • Unlike common stock, which has no set maximum or minimum dividend, the dividend return on preferred stock is usually stated at an amount per share or as a percentage of par value.
  • A dividend is the amount paid to preferred stockholders as a return for the use of their money.
  • Usually, stockholders receive dividends on preferred stock quarterly.
  • All preferred stock is reported on the balance sheet in the stockholders' equity section and it appears first before any other stock.

• Common Stock

  • Common stock is a form of ownership and equity, different from preferred stock, that still earns rights of ownership for its shareholders.
  • Common stock is a form of corporate equity ownership, which is a type of security .
  • Should bankruptcy occur, common stock shareholders receive any remaining funds after the bondholders, creditors (including employees), and preferred stockholders.
  • Also, Common stock usually carries the right to vote on certain matters.
  • Common shareholders do not get guaranteed dividends, so their returns can be uncertain.

• ROE and Potential Limitations

  • Return on equity measures the rate of return on the ownership interest of a business and is irrelevant if earnings are not reinvested or distributed.
  • What is the return on equity?
  • Return on equity (ROE) measures the rate of return on the ownership interest or shareholders' equity of the common stock owners.
  • Returns on equity between 15% and 20% are generally considered to be acceptable.
  • Return on equity is equal to net income, after preferred stock dividends but before common stock dividends, divided by total shareholder equity and excluding preferred shares.

• Owners' Equity

  • Ownership equity may include common stock, preferred stock, retained earnings, treasury stock, and reserve.
  • In an accounting context, shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the remaining interest in assets of a company, spread among individual shareholders of common or preferred stock.
  • Afterward, a series of creditors, ranked in priority sequence, have the next claim/right on the residual proceeds.
  • In financial accounting, equity capital is the owners' interest on the assets of the enterprise after deducting all its liabilities.
  • It appears on the balance sheet/statement of financial position, one of the four primary financial statements.

• Common and Preferred Stock

  • Firms may raise capital by receiving funds from investors in exchange for equity stakes in the form of common and preferred stock.
  • The main advantage of equity financing is that the business is not obligated to repay anything, since the individual investors are assuming a certain amount of risk in return for the possibility of making money in the future.
  • Typically, firms obtain their long-term sources of equity financing by issuing common and preferred stock.
  • All preferred stockholders are paid first, before common stock holders.
  • Participating preferred stockholders can "double dip", and are entitled to both their money back, as well as the leftovers for common stock, proportionate to the amount of common stock for which their preferred stock can be converted into.

• The Cost of Common Equity

  • The cost of equity is the return on equity that is required in order to compensate investors for the risk they undertake.
  • The cost of equity is broadly defined as the risk-weighted projected return required by investors on a company's equity in order to compensate investors for the risk they undertake.
  • -- Expected return for a security equals the risk-free return for the market plus the beta for the security times its risk premium.
  • In the dividend growth model, dividends paid to common shareholders along with the overall expected growth rate are used to calculate a cost for the common stock.
  • The risk premium is the additional rate that must be paid to common shareholders above what is paid to bond holders, given the amount of risk carried by the equity.

• Dividend Preference

  • Common stock is usually the residual equity in the corporation, meaning that all other claims against the corporation rank ahead of the claims of the common stockholder.
  • Diluting the common stockholders' control of the corporation, since preferred stockholders usually have no voting rights.
  • Unlike common stock, which has no set maximum or minimum dividend, the dividend return on preferred stock is usually stated at an amount per share or as a percentage of par value.
  • Common stock is a form of corporate equity ownership, a type of security.
  • There is no fixed dividend paid out to common stock holders and so their returns are uncertain, contingent on earnings, company reinvestment, and efficiency of the market to value and sell stock.

• Debt-to-Equity Ratio

  • In order to obtain assets used in operations, a company will raise capital through either issuing shareholder's equity (e.g., publicly traded common stock) or debt (e.g., notes payable).
  • Interest payments on debt are tax deductible, while dividends on equity are not.
  • Returns to purchasers of debt are limited to agreed- upon terms (i.e., interest rates), however, they have greater legal protection in the event of a bankruptcy.
  • The returns an equity holder can achieve have unlimited upside, however, they are typically the last to be paid in the event of a bankruptcy.
  • Calculating a company's debt to equity ratio is straight forward, and the debt and equity components can be found on a company's respective balance sheet.