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Return on share (initial) capital

Method of calculation

Formula for return on share (initial) capital: net profit / share capital * 100%

Ratio's description

This ratio complements the analysis of capital structure and long-term solvency based on equity coverage. It indicates the extent to which share capital (provided by the company's owners) finances the assets of the company. Share capital, in the moment of business start-up is the base source of funding. While running the business, the capital is supplemented with own capital coming from the write-off on profit (own capital from internal sources). Share capital can be also increased (depending on the legal form of the company) by adding new shareholders/associates, releasing new shares, or, if needed, increasing the value of said shares.

Ratio's interpretation

  • Ratio does not have reference values, however, the greater the value of the ratio, the greater the financial independence and creditworthiness of the company.
  • When assessing the changes in the ratio's value over time (over few periods):
    • the increase of the ratio's value due to the increase of share capital should be interpreted as an improvement of the financial standing of the company due to the increased capability to finance the assets from the capital provided by the owners,
    • the decrease of the ratio's value can in turn be interpreted as a deterioration of the financial standing of the company due to decreased capability to finance the assets from the capital provided by the owners.

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