Once a company has set its financial objective, someone has to tell the board and the shareholders whether it is being met. “We are doing well” is not enough. The company needs measures, a standard to compare them with and a way of looking at the result from the shareholders’ side.
This topic covers the measures used to evaluate financial objectives: the three comparisons that give a ratio meaning, return on capital employed, return on equity, earnings per share and dividend per share, and total shareholder return, which is the one measure that combines dividends and share price, with a worked set of figures for one company. It ends with the limits of each measure.
The next topic covers financial management in not-for-profit organisations, where profit is not the objective.
These ratios are used throughout the course, from the evaluation of working capital to the assessment of gearing, and they appear in the compulsory scenario question. In November Diet, 2025, Question 7 and May Diet, 2026, Question 3, ratios and returns were used to judge financial position and projects. Read governance, listing rules and reward schemes first.
In 30 seconds
Performance is measured against the objective using ratio analysis, compared over several years, with similar companies and with the industry average. Return on capital employed (ROCE) = profit before interest and tax (PBIT) ÷ (equity + long-term debt) × 100, using average capital employed. Return on equity (ROE) = profit after tax and preference dividends ÷ average share capital and reserves × 100.
Earnings per share (EPS) = profit attributable to ordinary shareholders ÷ weighted average shares; dividend per share (DPS) = dividend ÷ shares. Total shareholder return (TSR) = (closing price − opening price + dividend) ÷ opening price, which is the capital gain yield + dividend yield.
Measuring performance against the objective
Once a financial objective has been set, actual performance is measured against it by calculating suitable performance measures. Financial objectives are commonly measured by ratio analysis, and ratios are used to make comparisons:
- Over several years, to detect improvement or deterioration and to identify trends.
- With similar companies for the same period.
- With industry average ratios.
A ratio of 20% means little by itself; it is good news if last year was 15% and the sector average is 18%, and bad news if last year was 25%. The example below uses Okoye Plc.
| Okoye Plc, ₦ | 1 January | 31 December |
|---|---|---|
| Share capital (₦1 shares) | 2,000,000 | 2,000,000 |
| Share premium | 800,000 | 800,000 |
| Accumulated profits | 3,200,000 | 3,900,000 |
| Bank loans | 2,000,000 | 2,600,000 |
| Capital employed | 8,000,000 | 9,300,000 |
For the year, profit before tax was ₦1,550,000 after interest of ₦260,000, tax was ₦450,000 and profit after tax ₦1,100,000. Dividends paid were ₦400,000. The share price was ₦8.00 on 1 January and ₦9.20 on 31 December.
Return on capital employed
A company should earn a profit large enough in relation to the capital invested. Return on capital employed (ROCE) is the main profitability ratio: profit before interest and tax ÷ capital employed × 100, where capital employed is share capital and reserves plus long-term debt capital (bank loans, bonds and loan stock). Where possible the average of the opening and closing capital employed is used.
Okoye: profit before interest and tax = ₦1,550,000 + ₦260,000 = ₦1,810,000. Average capital employed = (₦8,000,000 + ₦9,300,000) ÷ 2 = ₦8,650,000. ROCE = 1,810,000 ÷ 8,650,000 = 20.9%. The figure is compared with earlier years, with competitors and with the sector, and with the cost of the finance that funds the capital.
Return on equity
Return on equity (ROE) measures the return the shareholders earn on their investment, normally using the values in the statement of financial position and not the market values: profit after tax and preference dividends ÷ share capital and reserves × 100, again using the average. Profit after tax is used because it is the profit available for dividends or reinvestment. Okoye: opening shareholders’ capital ₦2,000,000 + ₦800,000 + ₦3,200,000 = ₦6,000,000; closing ₦6,700,000; average ₦6,350,000. ROE = 1,100,000 ÷ 6,350,000 = 17.3%.
Earnings and dividends per share
Earnings per share (EPS) is profit after tax, and after preference dividends, per ordinary share for the year: profit attributable to ordinary shareholders ÷ weighted average number of shares. It may be the historical EPS in the financial statements or a forward-looking EPS the company expects next year. Dividend per share (DPS) is total dividends ÷ number of ordinary shares, and matters to shareholders who want income.
Many companies aim for steady growth in the dividend. Okoye: EPS = ₦1,100,000 ÷ 2,000,000 = 55 kobo; DPS = ₦400,000 ÷ 2,000,000 = 20 kobo; dividend cover = 55 ÷ 20 = 2.75 times.
Total shareholder return
Financial performance can also be measured by the return given to shareholders over a period. The total shareholder return (TSR) is the dividends paid plus the increase (or minus the fall) in the share price, as a percentage of the share price at the start: TSR = (closing price − opening price + dividend) ÷ opening price. It splits into the capital gain yield = (closing − opening) ÷ opening and the dividend yield = dividend ÷ opening price.
Okoye: the price rose from ₦8.00 to ₦9.20 and the dividend was ₦0.20 a share. Capital gain yield = ₦1.20 ÷ ₦8.00 = 15.0%; dividend yield = ₦0.20 ÷ ₦8.00 = 2.5%; TSR = 17.5%. Over several years the return is compounded: if a share rises from ₦8.00 to ₦11.00 over three years and pays ₦0.50 in dividends in total, the three-year return is (₦3.00 + ₦0.50) ÷ ₦8.00 = 43.75%, or about 12.9% a year compounded. TSR is meaningful when compared with the TSR of competitors and with a market index over the same period.
Limits of the measures
- Accounting-based ratios (ROCE, ROE, EPS) depend on accounting policies and estimates, can be manipulated and reflect the past.
- They ignore risk and, for EPS, the capital used; a rise in EPS may come from gearing.
- Each measure is a snapshot of one aspect. No one figure tells whether shareholder wealth is being maximised, so several are used together.
- TSR is affected by market sentiment and the market as a whole, not just the company’s own decisions, so it is compared with peers and an index.
- Different dates and definitions (average or year-end capital, before or after tax) make comparisons unreliable unless the same method is used.
The ideas in more depth
Why ROCE is compared with the cost of capital
A business earning 20.9% on capital that costs 12% is adding value. If its ROCE fell below the cost of the finance, each extra naira invested would destroy value. This links the ratio to the decision rules of investment appraisal.
Why TSR suits executive pay
Total shareholder return measures what the shareholder actually receives, so it is widely used in long-term incentive schemes. Its weakness, that it also reflects market movements, is handled by measuring it against a group of similar companies.
Sources and references
- For earnings per share see International Accounting Standard (IAS) 33 Earnings per Share. The other ratios are conventional management measures and are not defined by a standard.
These points are stated as at 5 November 2026.
Worked examples
Example 1: ROCE. Opening capital employed ₦8,000,000; closing ₦9,300,000; profit before interest and tax ₦1,810,000. Required: ROCE.
- Average.
(₦8,000,000 + ₦9,300,000) ÷ 2 = ₦8,650,000. - ROCE.
1,810,000 ÷ 8,650,000 = 20.9%.
Example 2: ROE. Profit after tax ₦1,100,000; shareholders’ capital ₦6,000,000 at the start and ₦6,700,000 at the end. Required: ROE.
- Average. ₦6,350,000.
- ROE.
1,100,000 ÷ 6,350,000 = 17.3%.
Example 3: TSR. The price rises from ₦8.00 to ₦9.20 and the dividend is ₦0.20. Required: the TSR.
- Gain.
₦1.20 + ₦0.20 = ₦1.40. - TSR.
₦1.40 ÷ ₦8.00 = 17.5% (capital gain 15.0% plus dividend yield 2.5%).
How to answer in the exam
- State the formula and say whether year-end or average figures are used.
- Compare with previous years, similar companies and the industry and say what the result implies for the objective.
- Add the limits of the measure used.
- Link to the objective: which ratio tests which objective (EPS for EPS growth, TSR for shareholder wealth).
Common mistakes in the exam
- Using profit after interest in return on capital employed.
- Leaving long-term debt out of capital employed.
- Forgetting the dividend in total shareholder return.
- Using the closing price as the base for the yield instead of the opening price.
- Quoting a ratio without any comparison.
- Treating a rising EPS as proof of rising wealth.
Quick revision
- ROCE = PBIT ÷ (equity + long-term debt); ROE = profit after tax and preference dividends ÷ equity.
- EPS = profit attributable to ordinary shareholders ÷ weighted shares; DPS = dividend ÷ shares.
- TSR = (price change + dividend) ÷ opening price = capital gain yield + dividend yield.
- Compare over time, with peers and with the industry.
Practice questions
These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.
Recall check: multiple choice
Question 1. Ratios are most useful when compared:
- Only with the formula
- Only with the budget
- Over time, with similar companies and with the industry average
- With nothing
Show the answer
C. The comparison gives the figure meaning.
Question 2. Return on capital employed is:
- Profit after tax ÷ equity
- Profit before interest and tax ÷ (equity + long-term debt)
- Revenue ÷ capital
- Dividends ÷ profit
Show the answer
B. Using the average capital employed where possible.
Question 3. Return on equity uses:
- Profit after tax and preference dividends over share capital and reserves
- Profit before tax over total assets
- Revenue over equity
- Dividends over equity
Show the answer
A. It measures the return on the shareholders’ investment.
Question 4. Total shareholder return is:
- Dividends ÷ profit
- Closing price ÷ opening price
- Earnings ÷ price
- (Closing price − opening price + dividend) ÷ opening price
Show the answer
D. It combines capital gain and dividend.
Question 5. Total shareholder return equals:
- Dividend yield only
- Capital gain yield plus dividend yield
- Capital gain yield less dividend yield
- EPS growth
Show the answer
B. Both measured on the opening price.
Question 6. Earnings per share is:
- Profit attributable to ordinary shareholders ÷ weighted average number of shares
- Dividends ÷ shares
- Equity ÷ shares
- Revenue ÷ shares
Show the answer
A. After tax and preference dividends.
Question 7. Average capital employed is preferred because:
- It is higher
- It is easier
- Profit is earned throughout the year, not at one date
- It is required by law
Show the answer
C. It is closer to the capital used over the year.
Question 8. A limitation of total shareholder return is that it:
- Ignores dividends
- Ignores the share price
- Is the same for all companies
- Is affected by market sentiment as well as company performance
Show the answer
D. It should be compared with peers and an index.
Question 9. Dividend per share matters most to shareholders who want:
- Capital growth
- Control
- Income
- Votes
Show the answer
C. Many companies aim for steady growth in it.
Question 10. A forward-looking EPS is:
- The EPS the company expects to achieve in the future
- The EPS of last year
- The EPS of a competitor
- The dividend
Show the answer
A. Usually for the next financial year.
Section B style: written questions
Question 11 (10 marks). (a) State the formulas for ROCE and ROE. (4 marks) (b) State the three comparisons used with ratios. (3 marks) (c) State THREE limits of ratio measures. (3 marks)
Question 12 (15 marks). Ladi Plc had capital employed of ₦6,000m at the start and ₦7,000m at the end, shareholders’ capital of ₦4,000m and ₦4,600m, profit before interest and tax of ₦1,300m and profit after tax of ₦700m. (a) Calculate ROCE on average capital. (5 marks) (b) Calculate ROE on average equity. (5 marks) (c) The sector averages are 18% and 15%. Comment. (5 marks)
A further written question
Question 13 (20 marks). A share price rose from ₦12.00 to ₦13.80 and a dividend of ₦0.60 was paid. The market index rose 12% and two competitors’ shares returned 18% and 9%.
(a) Calculate the capital gain yield, dividend yield and TSR. (8 marks) (b) Compare with the index and the competitors. (6 marks) (c) State TWO reasons why TSR alone may not show management’s performance. (3 marks) (d) State how TSR is used in executive pay. (3 marks)
Model answers
Show the model answer to Question 11
(a)
- ROCE = profit before interest and tax ÷ (share capital and reserves + long-term debt) × 100 (2).
- ROE = profit after tax and preference dividends ÷ share capital and reserves × 100 (2).
(b) Over several years (1); with similar companies (1); with industry averages (1).
(c) (1 mark each, any three) Depend on accounting policies; can be manipulated; ignore risk; reflect the past; affected by market sentiment (TSR); no single measure shows wealth.
Show the model answer to Question 12
(a)
- Average capital employed (₦6,000m + ₦7,000m) ÷ 2 = ₦6,500m (2)
- ROCE 1,300 ÷ 6,500 = 20.0% (3).
(b)
- Average equity (₦4,000m + ₦4,600m) ÷ 2 = ₦4,300m (2)
- ROE 700 ÷ 4,300 = 16.3% (3).
(c) ROCE of 20.0% is above the sector 18% (2.5). ROE of 16.3% is above the sector 15% (2.5), so the company is outperforming on both, subject to checking the trend and the gearing.
Show the model answer to Question 13
(a) Capital gain ₦1.80 ÷ ₦12.00 = 15.0% (3); dividend yield ₦0.60 ÷ ₦12.00 = 5.0% (3); TSR 20.0% (2).
(b) The 20% beats the index (12%) by 8 points (2) and the competitors at 18% and 9% (2), so the shareholders did better than in the market or in the alternatives (2).
(c) The share price reflects market sentiment and general conditions, not only management (1.5), and short-term price movements may not reflect long-term performance (1.5).
(d) It is used as a measure for long-term incentives, usually over about three years and relative to peers (3).
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