If you want to measure the return on your investment, you must use the return on investment analysis.
According to the Practical Accountancy Loose Leaf, this analysis determines how well your investment is doing compared to some measure.
Doing this analysis is important because it allows you, the investor, to review the performance of an investment.
If an investment is doing well, you may decide to invest more resources on it. And if it isn't doing well, you may decide to take money out or find out the reasons why it's doing badly.
These are the five analytical tools you can use to measure the return on your investment:
#1: Return on equity (ROE). This is the rate of return on the shareholders' equity for the given time frame.
This measure allows you as an investor to determine how much, as a percentage, the equity of a business has grown over the period.
#2: Return on assets (ROA) is the rate of return on the total assets of the business for the given time frame.
This measure will allow you to determine how much, as a percentage, the total assets have grown over the period. Essentially, ROA indicates how efficient the assets were without taking into consideration how the assets were funded.
#3: Return on operating assets (ROOA) is similar to ROA, but this measure only includes assets that were actively used to create revenue or 'operating assets'.
ROOA focuses the attention of the business owner and the investor on the assets actually required to run the business.
#4: Operating asset turnover rate (OATOR) helps to measure the effectiveness with which the business uses its assets to generate sales or revenue.
#5: Financial leverage tries to estimate the percentage change in net profit for a one percent change in operating profit, says the Loose Leaf.
This measurement will only be affected by the interest charge. A small financial leverage value indicates the business doesn't have a large amount of financial debt on its books. A small interest charge on the other hand indicates low debt levels.
Now that you know about the analytical tools, go ahead and measure the return on your investment.
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