Financial Glossary
Return on Common Equity (ROCE)
Return on common equity measures how much profit a company generates for its common shareholders relative to the common equity they hold. It is typically calculated as net income available to common shareholders, after subtracting any preferred dividends, divided by average common equity. Unlike broad return on equity, it isolates the return earned specifically by common stockholders.
Problem & Application
For founders and investors evaluating a business with multiple share classes or preferred stock, return on common equity shows the return that actually flows to ordinary owners after preferred holders are paid. It helps compare how efficiently a company turns common shareholders' capital into profit and can flag when preferred dividends are eroding the common position. Accurate equity records and a clean cap table are needed to compute it correctly.
In Short
Return on common equity sharpens the picture of profitability by focusing on what common shareholders actually earn on their stake.