Finance Formulas / June 2, 2018 / Alyvia French
The true benefit of a high return on equity arises when retained earnings are reinvested into the company’s operations. Such reinvestment should, in turn, lead to a high rate of growth for the company. The internal growth rate is a formula for calculating maximum growth rate that a firm can achieve without resorting to external financing. It’s essentially the growth that a firm can supply by reinvesting its earnings. This can be described as (retained earnings)(total assets ), or conceptually as the total amount of internal capital available compared to the current size of the organization.
Economic profit is the profitability measurement that calculates the amount that revenues received from selling a product exceeds opportunity costs incurred from using resources to make and sell these products. In other words, it’s the excess money a company earned from one course of action over another had they chosen differently.
The depreciable value of your fixed asset is based on the amount you pay for it minus the amount you'd earn selling it for scrap at the end of the depreciation period. Start with the initial cost, or the amount you paid. Subtract the salvage value that you anticipate being able to earn back at the end of the item's useful life.
The main thing to understand in managerial accounting is the difference between revenues and profits. Not all revenues result in profits for the company. Many products cost more to make than the revenues they generate. Since the expenses are greater than the revenues, these products great a loss—not a profit.
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