When an investor reviews companies for possible investment, an important figure is the return on investment. Return on investment, also called return on equity, gives shareholders of a company an idea of how much much net income a company is generating given the amount of money invested by shareholders. Thus ROI demonstrates how efficient a company is at creating income per dollar of shareholder income in common stock. Return on equity is expressed in terms of a percentage.
1. Review the balance sheet of the business for the previous fiscal year to determine the gross income. Similarly, review the balance sheet to determine the expenses for the fiscal year. You must also determine any and all tax liabilities paid on the income generated for the fiscal year. Subtract the expenses and tax liabilities from the income to obtain net income.
2. Calculate the shareholders' equity in the business by subtracting the total liabilities from the total assets. These figures will be available on the balance sheet. Liabilities include all of the amounts owed by the business; assets include all property of the business.
3. Divide the net income of the business by the shareholders' equity. For example, imagine that the net income of the business for the previous fiscal year is $250,000. Also, imagine that the shareholders' equity was $600,000. Divide $250,000 by $650,000 to obtain 0.385. Multiply the decimal that you get by 100 to obtain the return on investment percentage. In the example, the return is 38.5 percent.
- "Accounting For Dummies"; John A. Tracy; 2008
- "Financial Accounting Fundamentals"; J. Wild; 2009