What Is Return on Capital Gains?
The rate of return on capital, also known as the rate of profit on capital, refers to the ratio of a company's net profit (that is, profit after tax) to average capital (that is, capital input and its capital premium). It is used to reflect the ability of an enterprise to use capital to obtain income. It is also an evaluation index of the economic benefits of enterprises by the Ministry of Finance. The higher the return on capital, the better the economic benefits of the company's own investment, and the less the investor's risk, the more worthwhile it is to continue investing. For a company limited by shares, it means stock appreciation. Therefore, it is an important basis for investors and potential investors to make investment decisions. For business operators, if the rate of return on capital is higher than the cost of debt funds, moderate debt management is beneficial to investors; on the other hand, if the rate of return on capital is lower than the cost of debt funds, debt management is too high Will harm the interests of investors.
Return on capital
- Return on capital
- The return on capital is the company's after-tax profit and
- Return on capital = Net profit / average capital × 100%
- among them:
- For single-family enterprises, the net profit is the after-tax profit of the enterprise; for group enterprises, the net profit is the after-tax net profit attributable to the parent company.
- Average capital = [(
- Risk-Adjusted Return on Capital (RAROC): For a long time, the return on capital (ROE) and
- 1. Establish the concept of capital management with the goal of maximizing capital appreciation
- A significant feature of the modern enterprise system is that the enterprise is the carrier of capital survival, value-added and gains. All production and operation activities of the enterprise are first reflected in the organization, management and operation of capital. The metallurgical industry put forward the management policy of "enterprise management is centered on financial management, and financial management is centered on the operation of funds", which emphasizes the importance of the management of enterprise capital operation value forms. Capital management aims at the pursuit of maximum capital appreciation through the combination and flow of capital. First, capital operation should focus on improving the competitiveness of the enterprise and pursue the maximization of profits; second, it should focus on optimizing the allocation to maintain and increase value. Focus on doing better and stronger on one end, revitalizing existing assets on the other, replacing bad assets, absorbing high-quality assets, and implementing effective capital operations; forming a capital-oriented corporate operating mechanism, optimizing capital structure, reducing capital costs, and accelerating capital Cycle and turnover. For any piece of capital operation, it is necessary to repeatedly compare the size of opportunity cost to prevent the phenomenon of idleness, sluggishness, and precipitation of capital. In the process of capital management, we always aim to capture the rapid growth of capital, and seek maximum capital appreciation from the comparison of capital costs and benefits, and from the comparison of risks and returns.
- 2. Establish an analysis system to strengthen the analysis of indicators
- The rate of return on capital is highly comprehensive. Through analysis, we can find the key issues for the further rationalization of the company's operating activities, and find out the main reasons that affect economic efficiency and operating efficiency. It is conducive to the right remedy to improve capital return capacity. The following is an example of the return on own capital:
- (1) Formula
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- = Net sales profit × Capital turnover rate × Equity multiplier
- (2) Formula
- Return on own capital = return on investment + debt capital / own capital × (return on interest rate)
- It can be seen from the formula (1) that the size of the return on own capital depends on the profitability of the enterprise (net profit margin on sales), capital operation capacity (total capital turnover rate), and debt serviceability (equity multiplier). In this regard, we can use the DuPont analysis system to decompose the indicators layer by layer, and then use the comparative analysis method to find out the reasons and trends of the indicator changes, and point out the direction for taking measures. The net sales margin indicates the level of sales revenue. At the same time that the company increases revenue, it reduces costs and correspondingly obtains more net profit in order to increase or maintain profitability. The analysis of the total capital turnover rate indicator can be examined in physical form.In addition to analyzing the various components of the asset from the occupancy level, it can also be analyzed through the current asset turnover rate, inventory turnover rate, and accounts receivable turnover rate. The analysis of the efficiency of the use of the components of the relevant assets, etc., identifies the main problems affecting the turnover rate of total capital. The equity multiplier is mainly affected by the capital structure. A large debt ratio indicates that the company has a high degree of debt. Only when the return on investment is higher than the interest rate on the debt, borrowing can help increase profits, but at the same time bring more to the company. The risks need to be weighed from different perspectives. The formula (2) also illustrates the impact of capital structure on self-owned capital income. Although debt financing has financial leverage, low funding costs, and has the advantages of deducting income tax, the debt ratio should have a degree. The debt ratio is as high as over 70%, and the debt in the capital structure is also high. In the case that the state-owned enterprises 'capital and other owners' equity are not high or low, excessive debt management should be more cautious. By establishing a flexible and complete analysis system, we carefully analyze and study the impact of various factors on the rate of return on capital, improve the capital structure, adjust the capital investment direction, revitalize the stock, promote structural adjustment and the optimal allocation of resources, thereby releasing greater productivity. To get more income and maximize the input and output.
- 3. Pay attention to human capital investment
- Human capital investment is a people-oriented modern management idea that regards people as the most important resource. It reflects the business philosophy of "manpower determines the future of the enterprise". Today's economic development has evolved from the stage of labor economy and (natural) resource economy to the stage of intellectual economy; today's world competition has also become an economy-based transition from natural resource competition to human and intellectual resource competition, which has gradually formed Competition in total knowledge and scientific and technological strength led by high technology. Capital management also emphasizes people-oriented management to adapt to the era of knowledge economy. In an economy and society based on knowledge and intelligence as a resource, it is important to focus on the investment of human capital, the development, introduction, retention, utilization and management of talented intellectual resources, and to strengthen the cultivation of talents' innovative qualities. Only with high-quality talents can there be knowledge innovation, product innovation, system innovation, and management innovation; and it can continuously bring huge economic benefits and truly improve the ability of capital returns.