How to analyse the return on your company's investments to ensure they keep growing
Part of running your business includes making certain investments. The profitability of these investments is a lot more important than you might ever imagine.
If you leave them, assuming they're growing or earning you interest, you could be losing money without ever realising it.
But there's a type of financial analysis you can use to measure your investments returns. This analysis is Return On Investment or ROI and Investopedia.com says it's one of the most popular ways to analyse what your investments are bringing in.
Read on to learn how you use this measurement...
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How to do Return On Investment analysis
The Practical Accountancy Loose Leaf
says Return On Investments
is really helpful for you, as a business owner. This because it'll show you if an investment is doing well, in which case, you may want to invest more money. Or, you'll see it's doing badly and then you can remove your money.
Even better, it's versatile and simple to do.
simply use the following five analytical tools to do ROI analysis …
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Five analytical tools you can use when you do Return On Investments analysis
You must use these tools to do ROI analysis:
1. Return on equity (ROE);
2. Return on assets (ROA);
3. Return on operating assets (ROOA);
4. Operating asset turnover rates (OATOR); and
5. Financial leverage.
You must take the net profit after tax, divide it by the beginning of the period and then times it by 100 to work out your ROE, ROA and ROOA.
Take your revenue and divide it by the operating assets to work out your OATOR.
Then take your operating profit and divide it by your net profit for your financial leverage.
All of these will show you the financial gains or losses you made on your investment return.
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