armember-membership domain was triggered too early. This is usually an indicator for some code in the plugin or theme running too early. Translations should be loaded at the init action or later. Please see Debugging in WordPress for more information. (This message was added in version 6.7.0.) in /home1/wanrru6iyyto/public_html/wp-includes/functions.php on line 6114ARMember domain was triggered too early. This is usually an indicator for some code in the plugin or theme running too early. Translations should be loaded at the init action or later. Please see Debugging in WordPress for more information. (This message was added in version 6.7.0.) in /home1/wanrru6iyyto/public_html/wp-includes/functions.php on line 6114Another performance ratio used in business is return on equity. It is similar to return on assets except return on equity uses one section of the bottom half of the balance sheet<\/span><\/strong><\/a>. This section is technical what the owner’s have rights along with the earnings of the business entity. Recall that the balance sheet formula is:<\/span><\/p>\n \u00a0 \u00a0 \u00a0 \u00a0 Assets = Liabilities plus Equity<\/span><\/p>\n If there are no liabilities, then the return on equity will equal return on assets as identified here:<\/span><\/p>\n Assets = Liabilities plus Equity<\/span> Naturally it is rare in business not to have liabilities, especially with small business. Since liabilities are normal, the return on equity equals the return on assets less the portion assigned as return on liabilities. Look at this illustration to further understand.<\/span><\/p>\n Preston Light Fixtures \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Assets\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $11,706,400<\/span> Liabilities and equity combined equals $11,706,400 matching total assets.<\/span><\/p>\n Earnings for the year were $903,600 (adjusted for depreciation). Return on assets equals:<\/span><\/p>\n \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Return on Assets =\u00a0 \u00a0$903,600<\/span>\u00a0 \u00a0= 7.72%<\/span> The traditional formula for return on equity is:<\/span><\/p>\n \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Return on Equity = Net Profit<\/span><\/span> Using the information from above:<\/span><\/p>\n \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Return on Equity\u00a0 =\u00a0 \u00a0$903,600<\/span>\u00a0 = 17.04%<\/span> A sophisticated user of ratios<\/span><\/strong><\/a> is also interested in the return on equity as equity is a ratio of all invested capital (liabilities and equity). To figure this out, first determine ratio of earnings to liabilities and equity both as follows:<\/span><\/p>\n \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Liabilities<\/span><\/strong>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Equity<\/strong> Then determine the ratio of the total capital invested. Liabilities are 54.7% of all capital and equity is 45.3% of the total. Now multiply each return by their respective percentage of the total and it should match return on assets. Let’s find out.<\/span><\/p>\n \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Return on Liabilities\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 14.11% X its percentage of capital 54.7% and its result is 7.72%<\/span> From above, the return on assets is 7.72%.<\/span><\/p>\n A secondary method is to allocate the earnings to the two respective pools of capital, determine their results as a percentage of all capital and to simply add the two results together. It should match return on assets.\u00a0 Let’s find out.<\/span><\/p>\n \u00a0 \u00a0 \u00a0 Net Profit X 54.7% for liabilities is\u00a0 \u00a0 $494,269 divided by $11,706,400 = 4.22%<\/span> This modified version allocates the net profit between the liabilities and equity to formulate the relationship between liabilities and equity in the aggregate. It is of the utmost importance that the reader understand the relationship between the traditional definition and the summation result. The outcomes are completely different and a user of ratios needs to understand the underlying variances to truly evaluate how effective a company generates value for the investor. In a traditional formula the denominator is a lower value therefore the result is higher. When using this formula, understand both elements of the results as follows:<\/span><\/p>\n \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Traditional Return on Equity\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0= 17.04%<\/span> Every organization utilizes debt<\/span><\/strong><\/a>, thus there will always be a significant difference in the two values. As the two values get closer, it is an indication that the organization relies less and less on debt to fund its capital.<\/span><\/p>\n As an example, there will always be a large disparity between the two values for debt based industries. For example, real estate investment trusts (REITs) will have assets financed with long-term debt at 70% or more. Therefore the disparity will be significant, look at this simple illustration.<\/span><\/p>\n \u00a0 Cumberland Woods Apartments Assets\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $10,500,000<\/span> Similar to what was explained in return on assets, the return on equity is not a pure or perfect formula. The user must make adjustments in order to get an accurate result. To help the reader understand this particular business ratio and its application, the reader must first understand how equity is derived in business. With this knowledge the formula’s nuances are explained and how various changes impact the outcome. Finally, this lesson explains proper application and interpretation of the ratio. There are pitfalls to this formula and a sophisticated user is on the lookout for them. If they exist, there are other options to evaluate performance.<\/span><\/p>\n Equity in business is commonly referred to as owner’s investment (outside money) in the business operation. It has multiple names depending on the type of entity as illustrated in the following chart.<\/span><\/p>\n \u00a0 \u00a0 Equity Title<\/span>\u00a0<\/strong> \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Legal Entity<\/span><\/strong><\/span> There are actually several more.<\/span><\/p>\n Equity not only includes the initial investment (outside money) but it also includes the lifetime earnings (inside money) to date net of lifetime distributions\/dividends and draws dispersed to date. The equity section is divided into four sub groups as explained below.<\/span><\/p>\n Depending on the legal form of existence the four sections will have different titles but essentially have a similar meaning. For example, with partnerships, the treasury balance refers to capital accounts for retired or inactive partners. It is similar to a trust balance that is paid out over time in accordance with the partnership\/trust agreement.<\/span><\/p>\n The following is an example of the equity section of a corporation.<\/span><\/p>\n \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Grantsville Pilot Beef & Cattle, Inc.<\/strong><\/span> Along with liabilities the capital is used to purchase buildings, fencing, cattle, feed, supplies etc. The sale of beef cattle generates revenue which in turn has costs ending in a profit of $1,261,318. The profit generates a tax liability for the owners of which Grantsville Pilot paid $380,000. Thus the comparative profit to a publicly traded entity is $881,318. Take note, the net profit is the result of using the land, buildings, equipment, feed, veterinarian skills, even water and waste management to maximize the weight of cattle. All those assets were used to fulfill this single goal.<\/span><\/p>\n However, the assets were not purchased from equity alone, debt is used too. An investor is interested in the return on the equity component of all this.<\/span><\/p>\n In Grantsville’s case total equity exists because of three sources. First is the initial investment by outside entrepreneurs, i.e. other people’s money. In this case, it is $2,002,400. This outside money is composed of both preferred, common and treasury stock. Please note, the initial overall investment was $2,802,400 and $800,000 of that was bought back by the company via treasury stock.<\/span><\/p>\n The second source is inside money denoted as retained earnings. Retained earnings are the lifetime to date profits as of the beginning of the year. The last source is current earnings net of any current year dividends\/distributions or draws.<\/span><\/p>\n As explained in return on assets, the more accurate denominator is the beginning balance of the equity section. In Grantsville’s case the beginning balance is the actual stock value (outside money) plus retained earnings through the prior year as follows:<\/span><\/p>\n \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Stock (Outside)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $2,002,400<\/span> The correct formula for return on equity is:<\/span><\/p>\n \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Net Profit\u00a0 \u00a0 \u00a0 \u00a0<\/span> \u00a0 =\u00a0 \u00a0 \u00a0 $881,318\u00a0<\/span> \u00a0 \u00a0 \u00a0=\u00a0 14.23%<\/span> The traditional results are:<\/span><\/p>\n \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Net Profit\u00a0 \u00a0<\/span> \u00a0 \u00a0 \u00a0 \u00a0=\u00a0 \u00a0 \u00a0$881,318\u00a0<\/span> \u00a0 \u00a0 \u00a0=\u00a0 12.46%<\/span> Notice how including all equity increases the denominator reducing the result.<\/span><\/p>\n Now let’s break the return on equity into the sub components of return on initial stock and retained earnings, i.e. outside and inside money.<\/span><\/p>\n Outside \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Net Profit\u00a0 \u00a0 \u00a0 \u00a0 \u00a0<\/span> \u00a0= $881,318\u00a0<\/span> \u00a0 =\u00a0 44.01%<\/span> Again, a smaller denominator increases the result.<\/span><\/p>\n Inside \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Net Profit\u00a0 \u00a0 \u00a0<\/span> \u00a0 \u00a0 \u00a0 \u00a0 =\u00a0 $881,318\u00a0<\/span> \u00a0 \u00a0 =\u00a0 \u00a021.04%<\/span> Notice the denominator is larger reducing the result.<\/span><\/p>\n There are some interesting twists to the above. In accordance with the equity breakout, Grantsville’s current net earnings are $881,318. Suppose Grantsville dedicated those earnings to buying back preferred stock. Just as in 2015, it buys back an additional $800,000 (800 shares) of preferred stock. The outside money is now $1,202,400. The return on outside money increase to 73.3% as follows:<\/span><\/p>\n \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$881,318\u00a0\u00a0<\/span> \u00a0 \u00a0= 73.3%<\/span> The above identifies a flaw with this evaluation. The beginning balance of equity did not actually change as the above formula is really using the ending balance of outside money.<\/span><\/p>\n The return on equity analysis for inside and outside money is never used in publicly traded companies for two reasons. First, the outside money is actually what the company has sold in shares initially and doesn’t reflect what the current owners paid for the stock. Only current owners can evaluate their return on equity from the perspective based on what they paid for the stock in the market. Secondly, inside money is in a constant state of flux as shareholders often demand dividend payments changing the value of retained earnings.<\/span><\/p>\n With small business, both inside and outside money are locked as small business uses inside money to pay for growth and outside money rarely if ever changes hands. Given this, the return on outside money is the most appropriate ratio to evaluate closely held entities.<\/span><\/p>\n Overall, return on equity works best if looking at total equity and not broken out into the respective equity groups. But this analysis is different when evaluating for all capital invested into assets.<\/span><\/p>\n One of the drawbacks to relying on return on equity is it isn’t really a ratio for comparison purposes. This is because leverage (the use of debt) is different across the various business sectors. As debt increases the net profit earned will change. If leverage is properly utilized, net profit should increase to pay the principal component of the debt service payment. This increase in net profit results in a higher return on equity as an increase in the numerator without a change in the denominator results in higher returns on equity.<\/span><\/p>\n To illustrate, let’s assume Grantsville’s net profit is equal per dollar value of capital (liabilities and equity combined). It currently has four million dollars of debt for total beginning balance of $10,191,839 (liabilities of $4,000,000 plus equity of $6,191,839). Therefore, the net earnings per dollar of capital is:<\/span><\/p>\n
\nAssets = None plus Equity<\/span>
\n Therefore: Assets = Equity<\/span><\/p>\n
\n<\/strong><\/span>Preston manufactures custom light fixtures for high-end hotels and conference centers. The balance sheet is as follows:<\/span><\/span><\/p>\n
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Liabilities\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 6,402,500<\/span>
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Equity\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a05,303,900<\/span><\/p>\n
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$11,706,400<\/span><\/p>\n
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Equity<\/span><\/p>\n
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $5,303,900<\/span><\/p>\n
\n<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Net Profit\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $903,600<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$903,600
\n<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Capital Amount\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $6,402,500\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $5,303,900<\/span>
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Return\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a014.11%\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a017.04%<\/span><\/p>\n
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0Return on Capital\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a017.04% X its percentage of capital 45.3% and its result is 7.72%<\/span><\/p>\n
\n\u00a0 \u00a0 \u00a0 Net Profit X 45.3% for equity is\u00a0 \u00a0 \u00a0 \u00a0 \u00a0$409,331 divided by $11,706,400 = 3.50%<\/span>
\n\u00a0 \u00a0 \u00a0 Total Profit divided by all Capital (which equals all assets)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0= 7.72%<\/span><\/p>\n
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0Relational Return on Equity Element =\u00a0 3.50%<\/span><\/p>\n
\n\u00a0 Total Debt\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $8,500,000<\/span>
\n\u00a0 Equity\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $2,000,000<\/span>
\n\u00a0 Profit\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0900,000
\n<\/span>\u00a0 Return on Equity\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 45%<\/span><\/span>
\n\u00a0 Relational Return on Equity\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 1.63% (of the total 8.57% return on assets, equity is 1.63%, debt is 6.94%)<\/span><\/p>\nEquity in Business<\/span><\/strong><\/h2>\n
\n\u00a0 \u00a0 Stock<\/span><\/strong><\/a>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Corporation\/S-Corporation<\/span>
\n\u00a0 \u00a0 Capital Account\/Units\u00a0 \u00a0 \u00a0 \u00a0 \u00a0Partnership\/Limited Partnerships<\/span>
\n\u00a0 \u00a0 Capital Account\/Units\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Limited Liability Company<\/span><\/strong><\/a> (multiple members)<\/span>
\n\u00a0 \u00a0 Corpus\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Trust\/Business Trusts<\/span>
\n\u00a0 \u00a0 Fund Balance\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Non-Profit Organization<\/span><\/p>\n\n
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Balance Sheet – Equity Section Only<\/span>
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 November 30, 2016 (Fiscal Year-End)<\/span>
\n Stock\/Shares<\/span>
\n\u00a0 \u00a0 Preferred Stock – 2,000 Shares @ 5%\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$2,000,000<\/span>
\n\u00a0 \u00a0 Common Stock – Par Value $1.00\/Share\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 10,000<\/span>
\n\u00a0 \u00a0 Common Stock – Capital Paid In Excess of Par\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 792,400<\/span><\/span>
\n\u00a0 \u00a0 Sub-Total Stock\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $2,802,400<\/span>
\n Treasury<\/span>
\n\u00a0 \u00a0 Preferred Stock Redemption – 800 Shares (Nov 2015)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0(800,000)<\/span>
\n Retained Earnings Net of Dividends Paid<\/span>
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Earnings<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Dividends\u00a0<\/span> \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Net<\/span><\/span>
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Prior\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $2,647,591\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0($102,000)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0$2,545,591<\/span>
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a02011\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 402,752\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0(150,000)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 252,752<\/span>
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a02012\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 317,809\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0(73,000)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 244,809<\/span>
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a02013\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 596,937\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 (281,000)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0315,937<\/span>
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a02014\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 773,868\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 (400,000)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0373,868<\/span>
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a02015\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 906,482<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 (450,000)<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0456,482
\n<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Sub-Totals\u00a0 \u00a0 \u00a0 $5,645,439\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 ($1,456,000)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 4,189,439<\/span>
\n Current Earnings<\/span>
\n\u00a0 \u00a0 \u00a0 Net Profit Year-To-Date\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $1,261,318<\/span>
\n\u00a0 \u00a0 \u00a0 Dividend Payments (Tax Payments on Behalf of Owners)\u00a0 \u00a0 (380,000)<\/span><\/span>
\n\u00a0 \u00a0 \u00a0 Net Earnings\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 881,318<\/span><\/span>
\n Total Equity\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$7,073,157<\/span><\/p>\nNuances with Return on Equity<\/span><\/strong><\/h2>\n
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Retained Earnings (Inside)\u00a0 \u00a0 \u00a0 \u00a04,189,439<\/span><\/span>
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Beginning Balance of Equity\u00a0 $6,191,839<\/span><\/p>\n
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Beg. Bal. Equity\u00a0 \u00a0 \u00a0 \u00a0$6,191,839<\/span><\/p>\n
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Total Equity\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $7,073,157<\/span><\/p>\n
\n<\/strong><\/span>The original investment is $2,002,400 and all other types of investment are various forms of leverage (see leverage ratio) in business. Therefore, the amount truly at risk for the owners are the original invested dollars, $2,002,400. The return on the original investment is:<\/span><\/span><\/p>\n
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Outside Money\u00a0 \u00a0 \u00a0$2,002,400<\/span><\/p>\n
\n<\/strong><\/span>Similar to outside money, a user can evaluate the return on investment for inside money as:<\/span><\/span><\/p>\n
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Inside Money\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $4,189,439<\/span><\/p>\n
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$1,202,400<\/span><\/p>\nLeverage and Return on Equity<\/span><\/strong><\/h2>\n