REFS is
a mine of invaluable information for the private investor.
Selecting shares without its help is like trying to
clap with one hand tied behind your back.
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ROE
(Return on equity)
This measures
the return achieved on invested equity capital. The return is
therefore taken to be the normalised earnings, i.e. normalised
profit after tax, minority interests and preference dividends.
When calculating ROE, intangible assets are not deducted.
ROE is calculated
as follows:
Step 1:
Calculate return
When
calculating return, the starting point is taken as the normalised
earnings, which is the reported FRS3 earnings after excluding
any exceptional and non-trading items. Thus:
FRS3 PROFIT
AFTER TAX }
- MINORITY
INTEREST } AS REPORTED
- PREFERENCE
DIVIDENDS } (UNADJUSTED)
+ NON-TRADING
LOSSES } NET OF TAX
- NON-TRADING
PROFITS } AND MINORITY
+ EXCEPTIONAL
CHARGES } INTEREST ADJUSTMENTS
- EXCEPTIONAL
INCOME }
(Note:
In the event of the financial period being greater or less than
12 months in duration, the return is adjusted to an annualised
basis.)
Step 2:
Calculate invested equity capital
The invested
equity capital figure used in the calculation represents shareholders'
funds attributable to equity interests, and consists of the
following items from the balance sheet at the end of each period:
ORDINARY
CAPITAL
+ RESERVES
+ PROVISIONS
(INCLUDING DEFERRED TAX)
= INVESTED
EQUITY CAPITAL
Step 3:
Calculate ROE
The calculation
is completed as follows:
RETURN (ANNUALISED)
-----------------------------
X 100 = ROE (%)
INVESTED
EQUITY CAPITAL
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