Before starting a business project or during moments of expansion and structural changes, an entrepreneur must determine how much money they need.
This can be done independently or by seeking the assistance of a financial expert who will calculate the project budget, taking into account internal and external risks. The document will include a section specifying the amount of additional funding needed.
Here arises the question of which type of additional financing is suitable for the company - loans, grants, investments, or funds from venture capital firms. To make this calculation, an analysis of the company's activities or future project needs to be conducted in several stages.
|
|
|
|
|
What is return on equity
Return on equity (ROE) is a financial indicator that measures the net profit in comparison to a company's equity capital. It shows how effectively an organization utilizes its own funds. The value is calculated using the formula: ROE = Net Profit (for example, for a year) / Equity Capital of the company. By multiplying the result by 100, the value is expressed as a percentage.
 |
The data for calculations are obtained from financial reports, while the equity capital figure is derived from the balance sheet's liabilities. The formula may differ depending on the period for which the indicator is being calculated, such as a year, six months, or another period. To increase the return on equity, either the numerator—net profit—needs to be increased or the denominator—asset value or capital—needs to be decreased. |
When analyzing the profitability of equity, the concept of alternative return rate is often used. This involves comparing the income that the owner could have earned by investing their funds in another business. For example, they examine the percentage the owner could have earned by depositing their funds in a bank. If the deposit rate is higher, it may be worth considering restructuring or optimizing the business model. Roughly speaking, this indicator signals whether one should continue the current operations as they are or seek new approaches and solutions, such as attracting investments or obtaining a bank loan.
 |
The higher the ROE (Return on Equity) indicator, the more attractive the company becomes to investors. ROE shows how effectively a company utilizes its raw materials, tangible and intangible assets, and equipment. The data is tracked over time and compared to competitors, asset profitability, and contributions. After determining the indicators, the company develops a plan to increase profitability. In addition to ROE, companies calculate profitability using formulas such as return on assets, goods and products, production, fixed assets, personnel, and investments. The data for these calculations are derived from reports, financial statements, analytical reports, and cost calculations. |
Profitability helps forecast earnings and determine the return on investments. It is advisable to involve a specialist who can develop sales mechanisms, identify ways to increase asset turnover, and select appropriate tools and financial levers.
