Evaluating Performance

Evaluating Performance

Introduction

Business decisions are of worth to the organization if they are taken on the basis of strong analysis of financial aspects. When the organization decides to expand and invest in the project that may also be overseas, it is very essential to understand such things as return on equity (ROE) and internal rate of return (IRR).

The return on equity and internal rate of return are the two important financial tools that help the origination to take the accurate decisions based on their analysis that whether to invest in the project or not. The importance and advantages and disadvantages of each of the above financial tools is described in the later section. Also the comparison of both the tools of giant organizations in the same industry is analyzed.

Discussion

Return on equity (ROE)

The return on equity calculates the rate of return on the shareholders equity. Return on equity shows the actual amount of profit that the company has earned in comparison to the total amount of shareholder equity that is presented on the balance sheet (Kennon, J. 2012).

This financial tool particularly measures the efficiency of the organization in making the profits from every unit of shareholders' equity. It reveals the degree of efficiency of the company in using the investment funds to generate profits and to make growth. ROE is usually used to compare the companies that exist in the same industry. Sometimes ROE is also referred to as "return on net worth."

The formula to calculate the return on equity is

ROE = Net Income (After Tax)

Shareholder Equity

The ROE that lies between 15% and 20% are considered good for the companies. It is essential to know that the ROE increases if the value of the shareholders' equity goes down. This shows that the more the debt the company has, ...