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8.10 Return on Investment Analysis

The Return on Investment for a small business like Central Plumbing & Heating Inc. is the the Earnings before income and taxes divided by the Total Assets employed in the small business by a small business owner like Felix Gonzalez. This is a key profitability measure and it gauges just how well the small business is doing at turning over the investment in the Total Assets made by the owners of the business. This key profitability ratio is looked at very carefullyby lenders and potential partners in the small business world and it is important to understand that it has different meanings in different business environments.

Simply put the return on investment is the return ( profit or loss ) you make on the total investment made by you in any situation. Thus if you buy a stock for $100 and sell it for $110, your return on investment is $10. Then from there you can get into how long you held the stock and what your return on investment was at an annual rate and so on. In the small business context, the return on investment annually is the money that the business generatesafter operating expenses, but before paying income taxes and interest for a given investment in Total Assets.

We are projecting that for the years 2015, 2016 & 2017 the return on investment for Central Plumbing and Heating will be 44.4%, 44.8% and 43.8% respectively. This are extremely healthy returns on the investments made by Felix and Michael. We anticipate that we begin going after larger contracts with the increased cash buffer built up in the first three yeas of operation, the increased sales will improve this return on investment for the firm. These excellent return on investment ratios imply that for every $1 dollar invested in Central Plumbing and Heating by Felix and Michael, more than 40 cents will be available for paying interest and taxes and the rest will be all gravy.

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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