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8.11 Return on Equity Analysis

The return on equity ratio measures the ability of a small business like Home At Last Realty to be able to generate bottom line Income (Net Income) for its shareholders and is a key ratio that is looked at by lenders and especially potential partners when they are looking to either lend money to the business in the form of a business loan or make an investment into the business.

As our analysis reveals, the return in equity for the shareholders of Home At Last Realty is projected to be 14.9%, 26.1% and 33.7% in 2012, 2013 and 2014 respectively. What this of course means is that for $1 invested by the owners / investors in this business, they will get 14 cents back in 2012, 26 cents in 2013 and 33 cents in 2014. That is a fairly healthy return in investment for the owners who will also be building a brand in the coming years besides getting these returns.

Net Income is of course the final net income from which the shareholders / owners will get paid and it is projected that the net income for the next three years will be $8,738. $20,790 and $40,379 respectively. Total equity that includes the original contribution from shareholders adjusted for retained earnings and distributions is projected to be $58k, $79k and $119k respectively. It is important to note that the net income included here already has accounted for the salaries to both Jose and Diana. The extra income will be added to the cash balance for Home At Last Realty to enable the company to be able to withstand a tough business environment ahead.

Clearly, net income will be directly be affected if sales and or costs were to come in outside our projected range. Likewise if the owners had to come in with more personal capital or take on more loans to be able to keep the business going in lean times, it would impact the return on equity calculations.

Quick Links:

  1. Go to the Corresponding Template section for this industry.
  2. Go to the Corresponding Questionnaire section for this industry.

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