What is El ROI and Why is it Important for Your Business?
As a business owner, you’re likely always on the lookout for things that can help your company to be more successful. One important factor that can help you to achieve financial success in your business is understanding and tracking your El ROI.
El ROI, or Economic Value Added Return on Investment, is a measurement of your company’s financial performance. It’s a way to evaluate how much value your business is creating for its shareholders, after accounting for the cost of capital.
If you’re not familiar with El ROI, you might be wondering how it differs from other financial measurements. Basically, El ROI takes into account the cost of capital, which includes both debt and equity financing. This is important because it shows you how much money your business is generating after paying for the capital it used to acquire assets and fund operations.
In other words, if your business has a positive El ROI, it means that you are generating economic value for your shareholders. On the other hand, if your El ROI is negative, it means that you are destroying economic value.
Why Tracking El ROI is Important for Your Business Success
Now that you know what El ROI is, you might be wondering why it’s so important for your business. There are a few reasons:
1. Helps you make better business decisions: By tracking your El ROI, you’ll have a better understanding of how much value your business is creating. This can help you to make more informed decisions about things like pricing, investments, and capital expenditures.
2. Provides a holistic view of your financial performance: El ROI takes into account both the income and the cost of capital. This gives you a more complete picture of your financial performance than other metrics like profitability or revenue.
3. Encourages efficiency: Since El ROI is a measurement of value creation, it encourages businesses to be more efficient and make the most of their resources. By focusing on improving your El ROI, you can identify areas where you can reduce costs or increase revenue.
How to Calculate El ROI
Calculating El ROI might seem complicated, but it’s actually quite straightforward. Here’s the formula:
El ROI = Net Operating Profit After Taxes (NOPAT) – (Cost of Capital x Total Assets)
Let’s break this down a bit:
• NOPAT: This is your company’s operating profit after tax. You can find this number on your income statement.
• Cost of capital: This is the weighted average cost of the capital your business uses. This includes both equity and debt financing. You can calculate this by adding up the cost of each type of financing and multiplying it by the proportion of each.
• Total assets: This is the total amount of assets your business has. You can find this number on your balance sheet.
Once you have these numbers, simply subtract the cost of capital multiplied by the total assets from the NOPAT. The resulting number is your El ROI.
Improving Your El ROI
If your El ROI is lower than you’d like, there are a few things you can do to improve it:
1. Reduce your cost of capital: One way to improve your El ROI is to reduce your cost of capital. This can be done by refinancing debt at a lower rate or by attracting more equity financing.
2. Increase operating profit: Another way to improve your El ROI is to increase your operating profit. This can be done by reducing costs or increasing revenue.
3. Optimize your assets: Finally, you can improve your El ROI by optimizing your assets. This means using your assets more efficiently and effectively to generate more revenue.
Tracking and Evaluating Your El ROI
Now that you know how to calculate and improve your El ROI, the next step is to start tracking it on a regular basis. Here are a few tips to help you do that:
1. Use a financial management software: There are many different financial management software programs available that can help you track your El ROI. Look for one that is user-friendly and offers robust reporting and analysis features.
2. Set goals: It’s important to set goals for your El ROI and track your progress towards them. This will help you to stay motivated and focused on improving your financial performance.
3. Compare to industry benchmarks: Finally, it can be helpful to compare your El ROI to industry benchmarks. This will give you a sense of how your business is performing relative to others in your industry.
Conclusion
El ROI is an important measurement for any business owner to understand and track. By focusing on improving your El ROI, you can make more informed business decisions, improve your financial performance, and create more value for your shareholders. With the right tools and strategies in place, you can make El ROI a key component of your business success.