Return on equity shows output. The Formula You Need: Return on Equity to Help Investors

Return on equity is a rather relative indicator that characterizes the current turnover of an organization's income. The corresponding characteristic fully reflects the efficiency of the production process of the enterprise as a whole, and also shows the profitability of the main areas of production activity.

In the vast majority of cases, the corresponding indicators are used in the procedure financial analysis. This is due to the fact that they can more fully reflect the results of activities that have an economic focus. The level of the indicator can indicate the ratio of the results of such activities to the resources consumed in the production process.

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An appropriate analysis of financial indicators shows a complete picture of the organization's performance, its ability to pay credit loans, profitability, as well as prospects for development and growth. The information helps the organization's authorized analysts rely on specific metrics to forecast and make strategic decisions for the future.

It should be noted that the profitability is quite wide variety. All types indicate the effectiveness of the functioning of the organization from different points of view. The corresponding indicators can be conditionally combined into three groups, each of which has a separate focus - , from capital and .

It is the return on capital that can fully reflect the ratio of partial income to the average price of all capital invested in the production process.

Central moments

Concept overview

Return on equity is solely an indicator of the financial plan. It fully characterizes the volume of profit within the assets at the disposal of the enterprise. In the process of analysis, all assets are taken into account. To calculate the profitability of the organization's activities, it is necessary to establish the volume of sales made for a certain time period.

Relevant information can be considered both for the shipment of goods and for its payment. When considering this issue, the management of organizations rely on the convenience of a specific method for determining the sales volume. After that comes the definition. Such an operation is carried out in the same way as when determining the volume from sales.

Among other things, it is imperative to take into account operating expenses, which are included in the item fixed costs for the same period of time. Also, the tax collection is calculated, after which the net profit indicator is determined. It is worth noting the fact that all indicators in the calculation must be adjusted to a single measurement system, otherwise the process will lead to inaccurate results.

The final step is just the calculation of return on capital. To do this, net profit is divided by the assets of the organization. When calculating profitability, analysts can determine the quality of financial operations performed within the enterprise, as well as assess possible prospects.

Existing species

Practice shows that there are several types of enterprise profitability:

general information

It is worth noting immediately the fact that the higher the equity ratio, the better things are for the enterprise. However, it is important to bear in mind that a high level of the corresponding indicator can be obtained in cases where a certain financial leverage is used. In other words, for example, a massive share of debt capital can be used instead of equity, which, in turn, can have a rather bad effect on the stability of the company.

It is recommended to start the calculation of the indicator under consideration only when the organization has a certain share of equity in the form of net assets. If this condition is not met, then the calculation may lead to the detection of a negative value. In this case, the analysis will be quite problematic.

The following characteristics can directly affect the return on equity indicators:

• the effectiveness of the sale of manufactured products;
• return on all organizational assets;
• the ratio of borrowed and own funds.

To evaluate the returns of the production process, it is necessary to compare it with the information that can be found in the reporting documentation on alternative returns. For example, if the company's management decides to transfer part of its own funds to a bank deposit at 10% per annum, while the profitability ratio will be only 5%. In this case, the further development of the company will become impractical.

It is important to remember that high profitability indicators may not in all cases indicate an increased financial return on the organization's activities. Within this framework, if the majority of the capital is occupied by borrowed funds, then the solvency of the company may become very low. Any bank in this case will refuse to provide borrowed funds.

Accordingly, large debt obligations can lead to the collapse of the enterprise. It should be noted that it is required to calculate the return on equity only in cases where such capital is available. The use of the appropriate coefficient in the analysis may have a number of limitations.

Calculation of return on equity using the formula

In the process of analyzing the rate of return on capital, it is important to take into account certain circumstances. The profitability itself can fully reflect the current financial condition and each time decreases if the company resorts to massive investments that are directed directly to the expansion or transformation of production.

To determine the current level of costs within the framework of the functioning of the organization or the implementation investment projects there is a need to determine the actual value of capital. The corresponding concept is understood as a certain amount of funds, which must be paid without fail for the use of resources. In other words, these are the expenses of the organization aimed at servicing debt obligations.

In relative terms, the level of capital can be characterized by the relationship between maintenance costs and the amount of capital. All costs are made up of the cost of servicing own and borrowed funds.

Tsk \u003d Tsk x (Sk / capital) + Tsk x (Sk / capital)

Comparison of indicators

Comparison of key profitability indicators is presented in the table below:

For a better understanding of the difference between the organization's profitability ratios, it is necessary to remember that if the organization does not have preferred shares, which are expressed in long-term obligations, then the values ​​\u200b\u200bconsidered are reduced to the “equal” indicator.

Evaluation Formation

The following components can directly affect the return on equity:

• the efficiency of the operations carried out, resulting in a net profit from the organization;
• the return on all assets directly owned by the enterprise;
• the ratio of own and borrowed funds.

The underlying nature of the return of the production process is estimated by comparing it with the data presented in the reports on opportunity returns. In accordance with the calculations, the accounting department of the enterprise may come to the conclusion that the further development of the organization will be inappropriate, and most importantly, obviously unprofitable.

The company's return on equity can indicate the amount of profit that the company will receive per unit cost of its own resources. For potential investors, it is the value of the corresponding indicator that is decisive.

The coefficient gives a clear idea of ​​how correctly the investment funds were used. When calculating, it is important to take into account both internal and external factors.

Consider the types of profitability and what affects it.

Return on assets

Return on assets (ROA) is a financial ratio that characterizes the return on the use of all assets of the organization.

The ratio shows the organization's ability to create profit without taking into account the structure of its capital (financial leverage), as well as the quality of asset management. Unlike the return on equity (ROE), this ratio takes into account all the assets of the organization, and not just equity. Therefore, it is less interesting for investors.

Return on assets is highly dependent on the industry in which the organization operates. For capital-intensive industries (electricity, rail transport), this figure will be lower. For service companies that do not require large capital investments and investments in working capital, the return on assets will be higher.

Return on invested capital

Return on capital employed (ROCE) is an indicator of the return on equity and long-term funds invested in the commercial activities of the organization.

It is usually needed to compare the performance of different types of business and to assess whether a company is generating enough profit to justify the cost of borrowing at a certain percentage. If the interest on the loan is higher than the return on invested capital, then the organization will not be able to use the loan effectively enough to repay the interest. Therefore, it makes sense to take out only those loans, the interest on which is lower than the return on invested capital.

EBITDA margin

EBITDA margin (Earnings Before Interest, Taxes, Depreciation and Amortization) - earnings before interest, taxes and depreciation. The ratio shows the financial result of the organization, excluding the impact of the capital structure (interest paid on loans), taxes and accrued depreciation. EBITDA allows you to estimate cash flow without such a non-cash expense item as depreciation. The indicator is useful when comparing enterprises in the same industry, but with a different capital structure. Investors are guided by EBITDA as an indicator of the expected return on their investments.

EBIT return on sales

Return on sales by EBIT (eng. Earnings before interests and taxes) - the amount of profit from sales before interest and taxes in each ruble of revenue.

This ratio is intermediate between gross and net profit. Deducting interest and taxes allows you to compare different enterprises without taking into account the share of debt capital and tax rates.

A positive EBIT is considered normal. However, it should be borne in mind that after deducting interest and taxes, a loss may result.

Return on sales by gross margin

Gross Margin, Sales margin, Operating Margin is a profitability ratio that shows the share of profit in each ruble earned. Usually calculated as the ratio of net profit (profit after tax) for a certain period to expressed in Money ah sales volume for the same period.

Return on sales based on net profit

Return on sales by net profit (eng. Profit Margin, Net Profit Margin) - profit from sales per ruble invested in the production and sale of products (works, services).

Profitability of production assets

Profitability of production assets (capital productivity; English output / capital ratio) - shows how much output the company produces for each invested unit of the value of fixed assets. The higher the return on assets of fixed assets, the lower the cost per 1 ruble of production. The rate of return on assets depends on the industry, structure and characteristics of production.

Return on equity

Return on equity (ROE) - characterizes the profitability of a business for its owners, calculated after deducting interest on the loan.

This is the most important financial indicator of return for the investor and business owner, showing how effectively the funds invested in the business were used. Unlike return on assets (ROA), this ratio characterizes the efficiency of using not the entire capital (or assets) of the organization, but only that part of it that belongs to the owners of the enterprise.

Three factors affect the return on equity:

• operating efficiency (profitability of sales in terms of net profit);
• efficiency of use of all assets (asset turnover);
• the ratio of own and borrowed capital (financial leverage).

The return on equity ratio is compared with the percentage of alternative return that the owner could receive by investing his money in another business. For example, if a business brings only 4% of profit per year, and a bank deposit can bring 12% per annum, then the question arises of the advisability of further conducting such a business. The higher the return on equity, the better. However, a high value of the indicator may result from too high financial leverage, i.e. a large share of borrowed funds and a small share of own funds, which has a bad effect on the financial stability of the organization.

The calculation of the return on equity ratio only makes sense if the organization has equity (i.e., positive net assets). Otherwise, the calculation gives a negative value of the indicator, which is poorly suitable for analysis.

Coefficient equal to the ratio of net profit from sales to the average annual cost of equity. Data for calculation - balance sheet.

It is calculated in the FinEcAnalysis program in the Profitability Analysis section as Return on Equity.

Return on equity - what it shows

Shows the amount of profit that the company will receive per unit cost of equity capital.

Return on equity - formula

The general formula for calculating the coefficient:

Calculation formula according to the old balance sheet:

Return on Equity - Meaning

(K rsk) - in fact, the main indicator for strategic investors (in the Russian sense - depositors of funds for a period of more than a year). The indicator determines the effectiveness of the use of capital invested by the owners of the enterprise. Owners receive profitability from investments in the form of contributions to the authorized capital. They donate the funds that form the equity capital of the organization and receive in return the rights to a corresponding share of the profits.

From the position of the owners, profitability is most reliably reflected in the form of return on equity. The indicator is important for the shareholders of the company, as it characterizes the profit that the owner will receive from the ruble of investments in the enterprise.

This ratio has limitations. Income does not come from assets, but from sales. Based on K rsk, it is impossible to assess the effectiveness of the company's business. In addition, most companies use a significant share of debt capital. As an accounting metric, Return on Equity provides an indication of the returns a company earns for shareholders.

The return on equity is compared with a possible alternative investment in shares of other enterprises, bonds, bank deposits, etc.

The minimum (normative) level of profitability of entrepreneurial business is the level of bank deposit interest. The minimum standard value of the indicator Return on equity (K rsk) is determined by the following formula:

K RNA = Sd * (1-Snp)

• К rnc – normative value of return on equity, rel.units;
• Сд – average rate on bank deposits for the reporting period;
• Snp - income tax rate.

If the indicator K rsk for the period of analysis turned out to be lower than the minimum K rnk or even negative, then it is not profitable for the owners to invest in the company. An investor should consider investing in other companies.

For the final decision to withdraw from the capital of the company, it is better to analyze K rsk for last years and compare with the minimum level of profitability for this period.

Return on equity - scheme

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Synonyms

More found about return on equity

1. Analysis of the current level, features and trends of profitability indicators of Russian joint-stock companies
   As an indicator of profit in Russian practice, as a rule, net profit in foreign practice is net profit profit before interest and taxes profit before taxes profitability of investments of net assets - the ratio of profit to the amount of equity and long-term liabilities AT
2. Features of the analysis of consolidated statements (on the example of the analysis of indicators of financial leverage)
   To perform this calculation, it is necessary to first calculate the interest payable based on market interest rates as the product of the amount of borrowed capital of the corporation and market interest rates, then determine the conditional net profit, taking into account the payment of interest by the corporation at market rates and the conditional return on equity Calculation of financial leverage indicators in accordance with the concept of the enterprise allows you to make a number of
3. Principles of optimization of the capital structure of an agricultural enterprise
   The Maisky cooperative received 52 million rubles of profit due to the exploitation of only its own capital; its profitability, as well as economic profitability, amounted to 6.2% The Krasnaya Zvezda enterprise used
4. Ways to form the optimal capital structure of an agricultural enterprise
   of the Vologda municipal district showed that in its structure borrowed funds occupy an average of 30% of the total capital and the return on equity was 7.6% However, for individual enterprises, these indicators differ significantly.
5. Evaluation of the effectiveness of the use of equity and borrowed capital of the enterprise
   This trend can be viewed as a positive trend 3.3 Return on equity Shows the return in the form of net profit from each ruble of equity Rsk
6. Assessment of the influence of factors on profitability indicators
   Algorithm factor analysis 1 increase in return on equity due to the equity multiplier where ΔФ is the increase in the multiplier in absolute terms
7. Development of a model for optimizing the capital structure of an industrial enterprise in conditions of unstable financial development
   Depending on the idea of ​​the optimal ratio of equity and debt capital in modern financial and economic literature, the following practical optimization criteria have been formed: the criterion for maximizing the return on equity based on the indicator of the effect of financial leverage 2, 8, 7, 11 Oriented approach
8. Analysis of the state and use of borrowed (attracted) capital based on accounting (financial) statements
   The effect of financial leverage can still be characterized as an increment to the return on equity due to the use of a loan, despite its payment.
9. Assessing the relationship between an imperfect specification of property rights and the dynamics of economic indicators at Russian enterprises
   As marker economic indicators, we have chosen economic profitability and return on equity Economic profitability shows the efficiency of using all the property of the organization This is the most common indicator
10. The relationship of financial risks and indicators of the financial position of the insurance company
    An increase in the share of reinsurers, that is, an increase in credit risk and a decrease in liquidity risk, negatively affected profitability, while a decrease in cash, i.e. a decrease in credit risk, increased profitability 2 Return on equity For factorial analysis of return on equity, an integral method was used.
11. Vector method for predicting the probability of bankruptcy of an enterprise
    In the second example, the coefficients of the share of own working capital in assets and the turnover of assets, the return on equity and the profitability of current costs become pairwise interdependent coefficients. In the third example, all the presented coefficients are interdependent coefficients
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    ROA > SPavg due to the increase in return on equity due to the use of credit Negative EGF value occurs if the return on assets is lower
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    Ra return on equity Rk return on production Rп The normative range of profitability ratios can be formed on the basis of
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    The second factor includes return on invested capital, defined as the ratio of net operating income to invested capital; return on net assets, defined as the ratio of earnings before interest and tax to net assets; return on equity, defined as the ratio of net income to equity; return on invested capital by total income calculated as the ratio of total income for the year
16. Statistical analysis of the relationship between indicators of capital management and market value of public companies in Russia
    In 2004, 2006 and 2007, there was a direct non-linear weak relationship between the cost of equity and the value of the company in 2006 - a similar relationship between the absolute increments of these indicators Return on equity ROE in the period 2002-2008 takes both positive and negative
17. dupont model
    Return on assets % -4.726 26.454 31.18 -559.755 8 Return on equity % -11.63 50.344 61.974 -432.88 9 Return on sales % -1.611 7.281 8.892
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In this article, we will briefly and informatively try to tell you about an important business performance indicator - ROE. It reflects the basis of the existence of each company, regardless of its size and type of activity.

So what is ROE?

ROE - (eng. Return on Equity), is an indicator of return on equity. To start the functioning of any company, you need the initial investment, the profitability ratio, as a percentage, shows the amount of profit that each brings currency unit invested funds.

A simple example - if one dollar invested in the development of a company brings 10 cents of net profit, then the profitability of such a company is 10%. This demonstrates the amount of profit that each monetary unit brings.

The purpose of the existence of any business is to make a profit, so the level of profitability is a very important parameter. The payback time of invested funds and the amount of net profit received as a result of all activities depend on it. When running a firm, or when buying its shares, the profitability ratio is something that should be given priority.

Knowing its value, the owner of a newly opened company will also know its payback period, the degree of business efficiency. An investor who has bought shares will be able to determine the level of profitability of his investments (provided that the profitability ratio, at a given time period, remains the same).

ROE is - profitability is - business profitability.

Few calculations.

Below is the formula for calculating the ROE.

Sometimes, when calculating the profitability ratio, instead of net profit, I use the company's profit before taxes, or even before all its financial transactions. This approach is not entirely logical. Since even if a company receives a high income, this is not a guarantee of its success, since a huge amount of funds can be spent on paying loans, wages, rent, taxes, equipment maintenance, and the like. Therefore, to calculate the return on invested funds, it is desirable to use the net profit.

Advantages of ROE, its disadvantages, and conclusions.

The main advantages include:

1. Allows the investor to compare several companies with each other and determine for himself the one that has the best profitability.
2. Helps the owner to determine the effectiveness of the business.

Now for the disadvantages:

Using this parameter, it is very difficult to predict the profitability of a business and the value of its shares in the future. With it, you can accurately find out the level of profitability at the present moment, or the elapsed time. But it is not suitable for the forecast, because in the future a number of factors, both positive and negative, may appear that will affect the income levels of the company being valued.

There is another disadvantage that should not be forgotten. Most often, a high profit margin indicates the success of a business, but this is not always the case. This may also indicate that the company has a high level of borrowed funds, which may adversely affect the financial stability of the enterprise in the future.

In custody, necessarily watch a short video, it will help you consolidate the knowledge gained.

Return on equity shows the share of net profit of a business entity. The parameter is used by the owners of the company and its investors to assess the effectiveness of the use of investment funds. It identifies the work of not all assets, but only those belonging to the owners of the organization. How to calculate the coefficient and use it as an economic indicator?

Assessment of return on equity

What it is?

One of the main indicators of the effectiveness of doing business by a business entity is the profitability ratio of its own assets.

All investors, before investing funds to profit from their work, evaluate the performance of an economic indicator. It allows you to determine the level of competence of the company's management in the field of handling its own and investor assets.

The return on equity ratio allows you to determine the ratio of the entity's net profit to its assets, which are the property of the founder of the company and its investors. The calculation of the parameter is relevant only if the organization has positive assets that are not burdened with borrowing restrictions.

How to use

Conditions for the growth and fall of the profitability ratio

To assess the effectiveness of the functioning of a business in the field of investment, it is enough to analyze the values ​​of the profitability ratio. The higher its value, the more attractive the company looks in the eyes of investors, due to the effective use of funds invested in the project and obtaining high profitability results.

Zero and negative values indicators indicate the low productivity of invested funds. Company leaders should think about making changes to their work plan, how to implement an entrepreneurial idea and how to use free funds for this, which could subsequently bring additional income. It is not advisable for investors to invest in such projects, so they avoid cooperation with companies with low indicators of the economic indicator of the enterprise.

The analysis of the profitability ratio allows you to analyze the object of financing and compare the results of the profit received with alternative investments in shares and bonds of other companies, including banking institutions.

How the evaluation is done

Profitability assessment

The normative value of the return on equity allows you to evaluate the impact of the business. To implement the measure, it is necessary to compare the indicator with the value of alternative profitability. It allows you to determine the level of profitability that a businessman can achieve by investing values ​​in another company. Comparing the calculated values ​​of the parameter, one can easily determine the expediency of cooperation with the firm according to its exceeding indicators.

The return on equity of the owner and investors is affected not only by the amount of net profit from the sale of products and the return of all assets, but also by the ratio of equity to credit.

Compare criteria with normative values, formed on the basis of historical data of an enterprise in a particular region, will allow us to assess the prospects of the company. In each locality, the value of the coefficient is influenced by individual factors: inflation, the development of a competitive industry, or macroeconomic risks.

Impact on return on equity

High profitability ratios do not always characterize excellent financial results. The relevance of the analysis is determined by the presence of invested own values ​​in the enterprise. With the predominance of borrowed funds over them, it is impossible to evaluate the company's efficiency by economic indicators. The current circumstances cause a threat to its solvency.

The debt burden on the company has a negative impact on its financial stability.

Profitability is calculated only if there is own working capital, determined by the amount of assets remaining at the disposal of the subject after repayment of the company's debt, which is of a short-term nature. The predominance of credit funds over one's own values ​​is the reason for the negative profitability indicator, indicating the unprofitability of cooperation with such an entity.

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For the majority of business entities, the implementation of activities without the involvement of earthly funds is impossible. Even banking institutions function at the expense of attracted funds, which are deposits of depositors. The net assets of such institutions are a guarantee of financial stability.

Application restrictions

Do not rely on the profitability ratio as a tool for assessing the effectiveness of doing business. Its use in the analysis must be combined with other indicators. The real income of the interested entity is determined not by the number of assets, but by operating efficiency, expressed in sales of manufactured products or services rendered. Despite the limited information content of the parameter, it illustrates the profit of the organization, distributed among stakeholders.

Evaluation of the effectiveness of equity capital

Balance calculation formula

Founders legal entity when it is created, the authorized capital is formed. The values ​​included in it can be used in order to obtain a certain percentage of the profit received from their use. The economic indicator allows you to determine the amount of income from each ruble advanced by the participants. It characterizes the effectiveness of the use of equity capital.

After analyzing the value of the parameter, and comparing it with the standard values, the investor can determine the feasibility of cooperation with a business entity. Investors usually compare the characteristics of several enterprises and choose the one whose indicator is high.

With the same values ​​of start-up capital, several business entities may have different profitability indicators. Such conditions contribute to a higher rate of profitability for an enterprise with a lower profitability. This is due to the formation of the criterion at the expense of own funds, and not at the expense of revenue. In this situation, it will be more profitable to cooperate with a company that is characterized by a lower indicator.

Return on equity formula for calculating the balance sheet

The coefficient is determined by calculation. There are several formulas by which it can be calculated. Their choice is made depending on the tasks of the calculation. The initial data is taken from the accounting records. "Profit and Loss Statement", as well as "Balance Sheet", are the main documents for the appraiser.

The return on equity is determined using the value of the company's net profit for the reporting annual period, attributed to the subject's personal funds. In some cases, the expression of the coefficient in percentage terms is important. To do this, the base parameter should be multiplied by 100.

The formula for determining an economic indicator is represented by private values:

• net profit calculated for a certain time period taken for the billing period;
• investment funds received on the account of the enterprise for the same period.