Meanwhile, the profitability ratio arising from return on common stockholders equity is actually the link of net income in excess of common stockholders equity. The ratio, which is the relative amount, determines the productivity of the proprietors’ outlay. In cases where this profitability ratio of common stockholders equity is found to be higher than the rate of return on total assets ratio, then, clearly, this indicates that the company employed creditor sources. As such, the company is satisfactorily operating on the equity. However, a company operating on equities or on loans apparently boosts the company’s financial risk. Nonetheless, equities or loans improve sustainable income every time the rates of return on assets go beyond the expenditure of liabilities. The relationship is written as:
Profitability ratio = Return on common = Net income
Common stockholders’ Common stockholders’
Equity Equity
(Hunt, Weygandt, Kieso, and Kimmel, 2003).
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