Return on retained earnings (RORE) measures how effectively a company uses its accumulated profits to generate returns for its shareholders. You can calculate RORE by dividing the company's net income by its retained earnings.
Formula:
RORE = Net Income / Retained Earnings
Example:
Let's say a company has a net income of $100,000 and retained earnings of $500,000.
RORE = $100,000 / $500,000 = 0.20 or 20%
This means that the company generated a 20% return on its retained earnings.
Practical Insights:
- Higher RORE indicates better profitability: A higher RORE suggests that the company is effectively using its retained earnings to generate profits.
- Compare RORE to other metrics: Compare RORE to other profitability ratios, like return on equity (ROE), to gain a comprehensive understanding of the company's financial performance.
- Consider industry benchmarks: Compare the company's RORE to industry averages to assess its performance relative to its peers.
Conclusion:
Calculating return on retained earnings helps businesses evaluate their profitability and understand how effectively they utilize their accumulated profits. This metric provides valuable insights into a company's financial health and its ability to generate returns for shareholders.
