How to Boost a Subpar ROE

A robust ROE attracts investors to a company.

A subpar return on equity, or ROE, can hurt a company, since investors want to invest in companies that have above-average ROEs. A healthy ROE signals to investors that a company is generating profits rather than losing money, and is therefore a prudent investment. Boosting a subpar ROE requires a well-rounded approach to making business changes in order to maximize profits. By boosting a subpar ROE, a company will attract investors who can ensure that the company remains adequately funded for existing and future projects.

Instructions

1. Increase sales. When a company seeks to boost subpar equity profit, the first place it must start is with selling more to drive a higher profit. There are two approaches to increasing sales. The company can either keep the price of its product the same but aim to sell more of it, or the company can increase the profit margin per sale by raising prices, while selling the same quantity of goods. The company must examine its previous sales data to determine whether customers would purchase more goods or be willing to pay a higher price for goods.

2. Decrease productions costs. Decreasing labor and production expenses are associated with widening the profit margin of products. When a company is able to produce the same product at the same quality but for less money, the net savings simultaneously widen the profit margin and boost the company's return on equity.

3. Leverage debt. A company employing this strategy incurs debt by taking a loan at a low interest rate in order to use the monies to invest in resources, equipment or initiatives that may yield higher profits. Leveraging debt is based on speculation, and as such requires a substantial amount of business and investment experience, since it runs the risk of backfiring and leaving a company saddled with debt and stagnating equity returns.

4. Minimize taxes. Any company looking to boost a subpar ROE should have a financial team in place that is staffed with experienced and knowledgeable accountants and tax attorneys. These professionals make sure that the company is paying the least amount of taxes possible by taking advantage of corporate tax breaks, deductions and write-offs that are implemented by the government to drive business.

Tips & Warnings

• ROE is only one tool that investors use to decide whether to invest in a company. A company with a high ROE must also manage its debt. If the company has excessive debt, it will be unattractive to investors despite an above average ROE, because the debt -- by its very definition -- indicates that the company is lacking equity.

References

• InvestorWords.com: Return on Equity
• The Motley Fool: 5 Ways to Improve Return on Equity

Resources

• The Seattle Times: Coming to terms: Return on equity (ROE)
• Warren Buffet Secrets: Return on Equity