Useful Business Accounting Ratios - Return on Equity

The return on equity ratio is one of the most important ratios for a business to consider. It is calculated by dividing your net profit (after tax) by your equity. Equity is the difference between your assets and liabilities. Depending on your situation, it may be appropriate to use the equity figure from the end of the financial year, or to use an average for the whole year.

If, for example, your return on equity is 15% this means that $15 of new value is being created for every $100 you have invested in the business. For most businesses this would be a very good result. However, if your return on equity ratio is 2% it may raise the question of whether you should close your business down given that you would earn more by putting your money in the bank.

In considering results (especially ones that seem low) you should also take into account any other benefits that you receive from the business – for example, your own salary and non financial benefits like the satisfaction of having your own business. These factors, and plans to improve the financial results, may mean that low results are acceptable.

If you need help calculating your ratios, or with improving your results, please contact us.

 

Kristina Andersen
Andersen Accountants Limited
Telephone: 09 3695198
Email: Kristina@andersen.co.nz
Website: www.andersen.co.nz