Return on Shareholders Funds (ROSF) Ratio Formula & Example

Definition: The Return on Shareholders’ Funds (ROSF) ratio is an important financial measure that shows how much profit a company is making compared to the money that its shareholders have invested in it. This ratio helps investors understand how well a company is performing in terms of generating profits for the people who own its shares. To put it simply, ROSF tells us how much profit a company makes for every unit of money invested by its shareholders.

Understanding Shareholders’ Funds

Before diving into ROSF, it is important to understand what shareholders' funds are. Shareholders' funds refer to the total amount of money invested by the owners of the company (the shareholders). This includes the money they paid to buy shares in the company, along with any profits that the company has earned over time and retained (kept in the company instead of being paid out as dividends).

In simpler terms, shareholders’ funds represent the ownership capital of the company. It includes both the initial money shareholders invested and the additional money the company has earned and kept to reinvest in its business.

Importance of ROSF

The ROSF ratio is important for several reasons:

1. Investor Decision-Making: ROSF helps investors understand how well the company is using its resources to generate profits. If ROSF is high, it indicates that the company is profitable, and investors may be more likely to invest in it. On the other hand, if the ROSF is low, investors might be concerned that the company is not using its shareholders’ funds effectively, which may affect the decision to invest in the company.

2. Company Performance: A high ROSF ratio suggests that the company is performing well and is able to generate good profits from its shareholders' investments. It shows that the company is financially healthy and is making good use of the capital provided by its owners. A low ROSF may indicate that the company is struggling to turn its investments into profits.

3. Comparison with Competitors: ROSF can also be used to compare companies within the same industry. Investors and analysts often use this ratio to compare how different companies are performing in terms of profitability. A company with a higher ROSF compared to its competitors may be considered more efficient in generating profits from shareholders’ funds.

4. Profitability over Time: By tracking the ROSF ratio over time, investors can see if a company is becoming more or less profitable. This can help investors make decisions about whether to hold onto their shares, buy more, or sell them.

Formula:
Return On Shareholders Funds = ((Net profit after taxation & preference dividend) / (Ordinary share capital + Reserves)) * 100%

Example 1:
If the net income of PPC Ltd is $80,000 whereas shareholder's funds are $500,000. Then, the ROSF = (80,000 / 500,000) * 100% = 16%

Example 2:
Calculate the ROSF for Silvers plc, given the following data:
Net profit before tax $200,000
Corporation tax $20,000
Ordinary shares $310,000
General reserve $40,000
Retained profits $50,000
10% Debentures $180,000

Solution:
Net profit after taxation = 200,000 - 20,000 = $180,000
Ordinary share capital plus reserves = 310,000 + 40,000 + 50,000 = $400,000
ROSF = (180,000 / 400,000) * 100% = 45%