How to Calculate Return on Investment

Return on Investment (ROI) in Stock Analysis

Return on equity is a measure of profitability of a corporation that shows the level of profit made by a company with the money invested by investor. if the ROI of a company without any more money invest by the shareholders can improve and expand the business. However if a company make good return on equity does not need to take high levels of debt.

Calculating the ROI: - Even many analysts believe that Best Return on Investment is the most important profitability measures. It is calculated as follow:-

ROI = Net Profit after Taxes ÷ Stockholders’ Equity

Only by looking at the measure it is easy for an investor to know that up to what extent a company assets creator. The level of money that comes from an asset can be quickly determined by relating earnings to investors’ equity. In simple words it is better if return of a company is higher than the equity compared to its industry. When the analysts calculate investment candidates they look for at least 15%.

A Measure of Management Efficiency:-  Return on Investment is about how efficiently a company manages it pricing, assets and financial level. It is not only a measure to eaqrn returns more the equity but it is also of the level of the success get by an executive team to run a company. The rising of ROI shows that how efficient is a company to make profit without taking any more capital.

ROI and Earnings Growth:- it is a fact that unless the company increases its profits margin, it is unable for it to grow its earning such to exceed its return on equity. Without increasing the cash (by borrowing or selling more share).  I simply was saying that the firm with 10%ROI cannot grow faster than 10% annually. This is the reason why investor looks ROI of a company to assume its growth potential.

A Caution Regarding the Measure: - some share buy backs can artificially increase return on equity. So keep that in mind that is very important to note that if the vale of equity of a share holder decreases the High ROI increases. A higher level of debt means less equity of shareholders and higher ROI therefore a high level of debt can also improve the measures artificially.