Return on Policyholder Surplus (Return on Equity)
Return on equity is defined as the measure between the net income of the company generated and ownership interest or the shareholder’s equity. In insurance, return on equity is also called the return to policyholder surplus which means the sum of the net income after tax plus the unrealized capital earnings prior to the present policyholder surplus that is expressed in a percentage form. This figure is one of the measures that describe the profitability of the company from investment and underwriting activities. Moreover, regarding the formula, there are also numerous factors that are also used to seek for the return on revenue from one period to another.
Another common measurement to determine the return on equity is to get the net income and then subtract it by its common equity after that will be divided by its preferred dividends. This formula is known as the return on common equity. This type of method can give a slight difference on the result compared to the basic formula and is sometimes more preferred by investors. In some cases, return on equity includes common dividends.
There is still another formula to find out the return on equity. The formula is the DuPont formula that includes three major factors. Sales are being divided by net income, where in the net income is being multiplied by the dividend sales, in which the dividend sales has been multiplied by the stockholder average equity and is divided by the total assets. This formula is more complex the latter yet it takes into account more factors thus providing a more complete information.
Finding out the return on equity of the company from time to time is really important to go with the new trends in which most of the investors would consider before putting their money for investment. Getting the shareholder’s equity at the very start of the period while utilizing the formula or getting the shareholder’s equity at the bottom end of the period while utilizing the formula will give provide a good example basis for comparison. The changes in the state of profitability can be well recognized when it is completed.
Investors should take into account the various aspects needed in determining the return on equity. Since the figure will show the company’s overall profitability, the important factors of should be considered. Take for instance, if the company has high cost then the company might have a lesser return on equity, but still can be profitable. On the other hands, companies with lower cost might have greater return on equity but may not be a good investment. So, it is important to consider all the significant factors when it comes to purchasing a stock.
Whatever formula is used in getting the return equity, it is still the investors choice on where and what to invest. It is best advised that for those potential investors, it is best to ask for a financial adviser. Even if there are various expenses involved, the entire result would still be better.