How To Calculate Return Of Earnings

Calculating Return of Earnings in South Africa

Return of Earnings (ROE) is an important calculation for businesses in South Africa. It is the amount of money that a company expects to earn from an investment over a specific period of time. This calculation is crucial for assessing the profitability of a business and making informed financial decisions.

What is Return of Earnings?

Return of Earnings is a financial calculation that helps businesses determine the profitability of an investment. It is expressed as a percentage and is calculated by dividing the net profit of an investment by the cost of the investment. The result is then multiplied by 100 to get the percentage return.

Why is Return of Earnings important?

Calculating Return of Earnings is crucial for businesses as it helps in assessing the profitability of an investment. It allows businesses to compare different investments and make informed decisions about where to allocate their resources. By knowing the Return of Earnings, businesses can identify which investments are yielding the highest returns and which ones may need to be re-evaluated.

How to Calculate Return of Earnings

Calculating Return of Earnings involves a simple formula. Here is how you can calculate it:

Step 1: Determine the Net Profit

The first step in calculating Return of Earnings is to determine the net profit of the investment. Net profit is calculated by subtracting the total expenses from the total revenue generated by the investment. This will give you the amount of money that the investment has earned.

Step 2: Determine the Cost of the Investment

The next step is to determine the cost of the investment. This includes any initial investment made, as well as any additional expenses incurred during the investment period. This will give you the total cost of the investment.

Step 3: Calculate the Return of Earnings

Once you have determined the net profit and the cost of the investment, you can now calculate the Return of Earnings. This is done by dividing the net profit by the cost of the investment and then multiplying the result by 100 to get the percentage return.

Example:

Let’s say you invested R100,000 in a business venture and at the end of the year, the net profit generated by the investment was R20,000. To calculate the Return of Earnings, you would divide R20,000 by R100,000, which equals 0.2. Multiply this by 100 to get a Return of Earnings of 20%.

Benefits of Calculating Return of Earnings

There are several benefits to calculating Return of Earnings for businesses in South Africa. Some of these benefits include:

• Helps in assessing the profitability of investments
• Allows businesses to make informed financial decisions
• Identifies which investments are yielding the highest returns
• Helps in comparing different investment options
• Assists in creating a financial strategy for the future

Conclusion

Calculating Return of Earnings is an important process for businesses in South Africa. It helps in assessing the profitability of investments, making informed financial decisions, and planning for the future. By following the simple steps outlined in this article, businesses can easily calculate their Return of Earnings and use this information to optimize their financial strategies.