How to Calculate a Corporation's Return on Net Worth
A corporation's return on net worth may be referred to as return on shareholders' equity. Return on net worth indicates how efficiently the corporation is using the shareholder's investment capital to generate revenue. A high return on net worth ratio indicates a company's ability to use resources invested by the company's owners efficiently. Furthermore, a high return on net worth demonstrates a company has the ability to grow without financing through debt. Even so, a corporation must compare its net worth ratio with other businesses in the same industry to analyze its efficiency and profitability accurately.
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Instructions
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Compute net income. Net income can be found on a corporation's income statement. Add all company revenues. Subtract cost of goods sold and other expenses from company revenue. Subtract income taxes from the remaining amount, which equals the corporation's net income. For example, a company with revenues of $50,000 and expenses of $14,000 has a pre-tax income of $36,000. Let's assume the corporation has $16,000 in income tax expense. In this scenario, a corporation has a net income total of $20,000.
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Add all assets from the business. An asset exists as a resource controlled by the business that offers a future economic benefit. Assets include items such as cash, accounts receivable, inventory, prepaid rent, land, property and equipment. Assets are listed on a corporation's balance sheet.
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Add all of the corporation's liabilities. A liability represents an obligation to pay a debt incurred while operating a business. Liabilities place an obligation on a corporation's resources. Accounts payable, notes payable, salaries payable, interest payable and leases are examples of a corporation's liabilities. Liabilities appear on a corporation's balance sheet.
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Subtract liabilities from assets. For example, a corporation with assets totaling $100,000 and liabilities of $37,000 has shareholder's equity of $63,000. Assets minus liabilities equal shareholder's equity. Shareholder's equity appears on the balance sheet, along with assets and liabilities.
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Divide net income by shareholder's equity. Assume a company has $20,000 in net income and $63,000 in shareholder's equity. Divide $20,000 by $63,000 to calculate the company's return on net worth. In this case, return on net worth equals .317 or 31.7 percent.
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