Historical Background on the ROSF (Return On Shareholders Funds) Ratio
The Return On Shareholders Funds (ROSF) ratio has historically been used by industry investors as a measure of the profit for the period which is available to the owner’s stake in a business. The Return On Shareholders Funds ratio is therefore a measure of profitability. This measure of profitability is calculated as:
Return On Shareholders Funds (ROSF) =((Net profit after taxation & preference dividend) / ( Ordinary share capital + Reserves)) x 100
Industry investors quote the ROSF ratio as a percentage.
What does the Return On Shareholders Funds (ROSF) Ratio Mean to Industry and the Investor?
Investors & the industry will look at the relative size of the Return On Shareholders Funds ratio. This is because a high ROSF percentage indicates that a company is profitable and has more profit available for shareholders.
Why is Return On Shareholders Funds (ROSF) Considered Important?
This is a narrower assessment of profitability (compared with ROCE) and therefore gives the investor a deeper insight into the profitability that they are concerned with. It is always critical to take professional investment advice before making any investment decisions.
What Are the Key Problems With Return On Shareholders Funds Ratio Analysis of a Company or an Industry?
Three possible key problems with the Return On Shareholders Funds (ROSF) percentage are:
- Industry and investors put too much emphasis on the ROSF ratio without carrying out analysis of the supporting key profitability ratios.
- Industry and investors often do not do enough analysis with similar companies.
- Industry and investors can find it difficult to get industry benchmark ROSF ratios.
What are the Secondary Problems With Return On Shareholders Funds Ratio Analysis of a Company or an Industry?
Possible secondary problems with the Return On Shareholders Funds ratio include the following:
- ROSF ratios use historical data. Historic data is not always a sound basis for future earnings.
- The ROSF can vary due to short-term influences (eg recent poor historic results driven by one particularly unprofitable contract).