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How Do You Calculate Return on Retained Earnings?

Published in Financial Analysis 2 mins read

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.

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