Return On Average Common Equity
What Is Return on Average Common Equity?
Return on Average Common Equity (ROACE) is a financial metric that measures how efficiently a company generates profits from shareholders’ equity over a specific period.
Why It Matters
ROACE helps investors evaluate a company’s profitability and efficiency. It is especially important when comparing companies within the same industry.
How ROACE Works
ROACE is calculated by:
- taking net income
- subtracting preferred dividends
- dividing by average common equity over time
It reflects how well management uses shareholder funds.
Example
A company earns $1 million on $10 million in average equity, resulting in a 10% ROACE.
ROACE vs Return on Equity (ROE)
- ROACE uses average equity over time.
- ROE uses equity at a single point.
FAQs About ROACE
Why use average equity?
To smooth fluctuations over time.
Is higher ROACE better?
Generally, yes.
What is a good ROACE?
Depends on industry benchmarks.
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