The measurement of the monetary results obtained by a company is one of the most important matters of this. There are several ways to measure the profits obtained taking into account an investment in a certain period of time.
A very simple and most used way to measure the percentage of profit is the return on investment, whose formula is essential to learn to master. If you are looking for greater profitability, and you do not know how to use this tool, we will explain you shortly.
What is and what is the return on investment?
Every company must be cautious with the issue of profits and, therefore, must look for a metric to know the profitability of a specific product or the complete set of products and services in general of a business institution.
The metric most used today, especially by those investors in traditional advertising and digital marketing , is the application of the return on investment formula , also known as ROI, whose simplicity is controllable by anyone who knows how to take a calculator and have fingers to mark the buttons.
This famous formula basically consists of knowing the amount of money invested and the amount of money collected after the sale or provision of services, in a given period of time. It is enough to know these two figures to have the result of whether it has been profitable, that is, whether it has been a good ROI or not.
Take the amount of final sales of 10 days, for example, simultaneously grab the amount that the investment meant before that time. Take these numbers and subtract them.
Finally, take that result and divide it by the already known amount of the investment, which will yield a result that will be multiplied by 100, to know the percentage of profits obtained and therefore, know how profitable that product was sold in those 10 days, and this will surely increase the net worth of a company.
What is the net worth of a company?
Perhaps you have heard about the terms assets and liabilities , and you know what they refer to. Now, if you don’t know, we will explain it to you shortly, since its knowledge is a requirement to understand the concept of net worth.
It can be said roughly that assets are those that, be they products and services or simply accumulated money, represent a monetary amount equal to the full value of the entire business entity , this if we are talking about a business net worth.
For their part, liabilities reflect the total value, whether in products, services and / or real estate, owed by a company or company.
Like ROI, here we have a formula that can give us the value of net worth, and we get it by subtracting the assets less the liabilities of a company. The amount obtained from this operation will be the net worth of that commercial company.
What does ROE mean and why is it so important as an entrepreneur?
In addition to the two concepts already clarified, there is the ROE, whose acronym in English translates the following into Spanish: return of capital. This is another metric used to know the value of the profits obtained in a period of time, under the concept of capital, which can be an individual capital by a partner of the company, or the capital of the entire company as such.
It is an indicator where another concept of relevance in accounting is considered, the net profit, to know the profitability of a company or company, that is, if we are talking about a good ROE or not, for the shareholders or investors of that company.
As you can imagine, a formula is also used to establish the value of that profitability. In English ROE also translates as return of heritage ; and its formula is simple to apply.
For this you need a calculator and your fingers, taking the value of the net profit of a certain period, and the value of the equity (already explained previously) of the company and divide, respectively. The result will be the ROE of an investor or a shareholder or all of these within a company.
