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Rate of return |
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Rate of returnThe percentage of an asset's value that the owner of the asset earns, usually per year.Rate Of ReturnThe annual percentage of return on investment on income property.Rate of returnCalculated as the (value now minus value at time of purchase) divided by value at time of purchase. For equities, we often include dividends with the value now. See also: Return, annual rate of return.Rate of return Similar MatchesReturn on capital employedReturn on capital employedA measure of a company's profitability. It may be defined as:Earnings before interest and tax divided by total capital employed plus short term borrowings minus total intangibles.ROCE takes all the assets employed in the business, including borrowings, and measures the return the company made on them. If a company has a low ROCE, it is using its resources inefficiently, even if its profit margin is high.Calculation: multiply operating profit by 100, and divide the result by total capital employedExample: Company A made an operating profit of £897m on total capital employed of £4,342m. ROCE was therefore (897 x 100) / 4,342= 20.66%Yardstick: A company's ROCE should be higher than the return on gilts (the benchmark for a risk-free investment return). And unless it is higher than the cost of borrowing, any increase in the company's borrowings or the general level of interest rates will reduce shareholders' earnings. A ROCE of 20% or more is considered very good. External increasing returns to scaleExternal increasing returns to scaleExternal economies of scale. Systematic ReturnSystematic ReturnThe part of the return dependent on the benchmark return. We can break excess returns into two components: systematic and residual. The systematic return is the beta times the benchmark excess return. Dividend Discount ReturnDividend Discount ReturnThe rate of return which equates the present value of future expected dividends with the current market price of a security. Return on equityReturn on equityThe adjusted profit of a company divided by its equity. For instance, if the adjusted profit of a company is £1m and Equity is £10m, the Return on Equity is 10%.Adjusted profit is the profit of the company adjusted to exclude the impact of non-recurring exceptional gains, losses, income and charges. The figure can be found in the company's Profit and Loss Account. Equity is the total of ordinary share capital plus reserves, and both figures appear in the company's Balance Sheet. In calculating Return on Equity, you can use the Equity at the end of the year or the average between the opening and closing equity. Further SuggestionsExpected future returnCumulative total return return on total assets After tax real rate of return Consolidated tax return Required Rate of Return (RRR) total return Portfolio internal rate of return Individual tax return joint tax return Return of capital Risk adjusted return Excess return on the market portfolio Average accounting return Return Diminishing returns Return on sales Risk return trade off T period holding period return Unleveraged required return Compound Annual Return Certainty Equivalent Return Geometric mean return Risk adjusted return Separate tax returns |
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