Two Ways To Know Your R.O.I is A.O.K.

Lincoln on U.S. one cent

Image via Wikipedia

An investment in a business should yield more than a bank certificate of deposit which should yield more than stuffing cash in your mattress.  We need a way to compare the investment return across asset classes.

The profitability financial indicators for your business tell how much money your investment in company assets is returning. Generally people start or buy a business to make a profit.

There are two primary ways to measure a business investment return:

Return on Assets (ROA): The return on assets indicator shows the amount of net profit on each dollar of assets.  The ROA ratio shows how productively the fixed and liquid assets are generating business profit.

Return on Equity (ROE): Some of those assets are purchased with equity and debt so the return on equity ratio reveals how much positive leverage the company is generating with borrowed funds.  In other words ROE measures the return generated only by the equity investment in the assets.  ROE will exceed ROA (positive leverage) if the loan interest rate is LESS than the ROA.

The goal is to generate a high enough return on the investment in the company to compensate for the risk and to match or beat the return of your industry competitors.

About Michael Shelton

Your Business Coach Facilitating Delegation and Work Group Engagement Michael Shelton has over twenty-five years of business and military accomplishments, including extensive experience with one of the largest, publicly traded real estate investment trusts (REIT). He is a qualified business coach with assignments in cross-functional work group management, strategic planning, unit leadership, joint venture acquisitions, executive education, mentoring, training and merger integration. Michael has accumulated best practices for building committed work groups from more than $4 billion of capital markets transactions and commercial property development. He served as a commissioned officer and helicopter pilot in the U.S. Army, and earned his MBA from The University of Arizona. Michael has served as a major conference panelist and is the author of Cash Flow Rich, Winning Ways to Evaluate and Finance Real Estate. Today, he helps business owners get more work group engagement as President and CEO of Shelton Business Services, LLC in Scottsdale, Arizona. Disclaimer: I don't offer investment, legal or tax advice. Talk to your broker, accountant or lawyer for investment, tax and legal help. I might own stock in the companies I mention on-line. My posts, tweets and other on-line activity are my personal thoughts and don't represent my employer or company.
This entry was posted in Executive Coaching, Finance, Management Consulting, Uncategorized and tagged , , , , , , . Bookmark the permalink.