Return on Proprietor's Fund and Return on Equity Capital
Chapter Thirty-Seven
Syllabus topic 4, "Combined Ratio : i) Return on capital employed (Including Long Term Borrowings) ii) Return on proprietor's Fund (Shareholders Fund and Preference Capital) iii) Return on Equity Capital iv) Dividend Payout Ratio v) Debt Service Ratio vi) Debtors Turnover vii) Creditors Turnover (Practical Question on Ratio Analysis and Du Point Analysis)"
Pages 97 to 99 of 162
Return on proprietor's fund
Return on proprietor's fund = (Profit after tax / Proprietors' funds) x 100
Expressed as a percentage. What it measures: what the owners' money, taken together, earned after the lenders and the government were paid.
| Element | What it is |
|---|---|
| Profit after tax | After interest and after tax; before the preference dividend |
| Proprietors' funds | Equity capital + preference capital + reserves and surplus, less fictitious assets |
The preference dividend is NOT deducted, because the preference capital is in the denominator. Consistency between numerator and denominator, again.
Worked on Sunrise
| 2026, Rs | 2027, Rs | |
|---|---|---|
| Profit after tax | 1,82,000 | 2,38,000 |
| Proprietors' funds | 13,40,000 | 15,00,000 |
| 2026 | 2027 | |
|---|---|---|
| Return on proprietor's fund | 13.58 per cent | 15.87 per cent |
Return on equity capital
Return on equity capital = ((Profit after tax less preference dividend) / Equity shareholders' funds) x 100
Expressed as a percentage. What it measures: what the equity shareholders earned, which is the residual after everybody else.
| Element | What it is |
|---|---|
| Numerator | Profit after tax less the preference dividend |
| Denominator | Equity share capital + reserves and surplus, less fictitious assets. No preference capital |
Some questions define the denominator as the equity share capital alone, excluding reserves. Both are used and they give very different answers. State which you have taken. The reserves belong to the equity shareholders, so including them is the better measure and is what is given here.
Worked on Sunrise
| 2026, Rs | 2027, Rs | |
|---|---|---|
| Profit after tax | 1,82,000 | 2,38,000 |
| Less: preference dividend, 9 per cent on 2,00,000 | 18,000 | 18,000 |
| Profit available to equity shareholders | 1,64,000 | 2,20,000 |
| 2026, Rs | 2027, Rs | |
|---|---|---|
| Equity share capital | 10,00,000 | 10,00,000 |
| Reserves and surplus | 1,40,000 | 3,00,000 |
| Equity shareholders' funds | 11,40,000 | 13,00,000 |
| 2026 | 2027 | |
|---|---|---|
| Return on equity capital | 14.39 per cent | 16.92 per cent |
The three returns together
This is the table that makes the module cohere.
| 2026, per cent | 2027, per cent | Measures | |
|---|---|---|---|
| Return on capital employed | 17.24 | 20.00 | What the whole capital earned |
| Return on proprietor's fund | 13.58 | 15.87 | What the owners' money earned |
| Return on equity capital | 14.39 | 16.92 | What the equity shareholders earned |
Read the order. The return on capital employed is the highest because it is measured before interest and tax. The return on the proprietors' fund is lowest because tax has been taken out and preference capital is still in the base. The return on equity is higher than the return on the proprietors' fund, and that is the finding.
Why equity beats the proprietors' fund here
Because the preference shareholders earn less than the business does.
| Rs | |
|---|---|
| Preference capital | 2,00,000 |
| Preference dividend at 9 per cent | 18,000 |
| Per cent | |
|---|---|
| Preference shareholders earn | 9.00 |
| The proprietors' funds as a whole earn | 15.87 |
The surplus above 9 per cent on the preference money belongs to the equity holders, which is why their return, at 16.92 per cent, is higher. That is gearing working in the equity shareholders' favour, and the chapter on capital gearing showed the mechanism.
The rest of this chapter
Module one is free. The rest of this chapter comes with the B.Com. (Accountancy) Semester 3 notes.
You are reading a chapter from a later module. Everything in module one of every subject stays free, and so does the syllabus.
Notes: ₹499 Already bought it? Sign in
Free either way: the syllabus, and module one of every subject.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.