Organization has many aspects and has many objectives. To fulfil the same it needs financial support and everything cannot be done with the debt. The company needs to raise its equity in order to achieve the organizational goals. The equity is the sharing of ownership of the company with the shareholders. By issuing shares the company makes an open offer for public through a prospective and it is the proposal reflecting forecast about the future of company’s prospective business activities.
The prospect is the proposal to make shareholders believe about the futuristic return that they would gain if they bought the shares of the company. Initial Price Offer is the technical term for the same. The journey of the money started from accepting the payment in exchange of the ownership in the company gives rise to the importance of return on equity.
The various forms of income that are grossed up and the expenditures deductible from it helps the company to calculate the net income earned for the period. The period is usually a single Financial Year having twelve months, starting from April 1, 2018 to March 31, 2019. The various direct cost, prime cost, indirect cost, fixed cost, factory cost and variable cost are regarded as the expenditure incurred by the company. These costs have further sub division as well. The income earned by the company majorly constitute of the revenue earned through the sales and the income earned by making investments whether in short term or in long term investment options. The company needs to have a proper look at the taxes due as well as payment of the same is also accountable. The responsibility of the company towards preparation of its financial statement is binding on it through the applicability of Companies Act, 2013.
The financial statement comprises of the profit and loss account for the period and balance sheet as on the date. The net income is derived from the profit and loss account and the equity shareholders fund is derived from the balance sheets.
The accuracy of the both is of immense importance. The experts are appointed by the company to calculate the values of the same. The shareholder’s trust is build up with the help of these derivations and display of the same is also important.
The company has to gets its financial statement audited at regular interval, if it is applicable on it.
The income is derived after carrying out various business activities by the company and it is a heavy deal. It is a complex process and not always the results are positive, the company can have negative returns too. At that time the ROE becomes negative as well. The return is fixed for the equity shareholders is the proposed dividend for the period and once it is proposed it cannot be retrieved back. The company needs to have a proper look at the various aspects that can always result into a positive return. Expenditure incurred is unavoidable and is in a very large amount. The fixed assets need a large portion of the financial budget of a company and their repair and maintenance is also an important point. The various current assets that are available needs to be maintained by the company, the cash in hand and the amount required to pay the liabilities as and when they become payable. All of these aspects are important for the company.
Moving ahead the importance of the RETURN ON EQUITY cannot be overlooked by the company. The organization needs to be sure about the market representation of its finances but should never practice window dressing. The fraud representation of a financial statement, just to make it look attractive is never a great option? The financial statement needs to be shared with the shareholders annually and the same requires to represent the return on equity briefly. The graphs and the trend analysis can be easily done with the derivation of return on equity. The trend analysis reflects the language that can be easily understood by a lay man and it can be insured by him/her that the deal which they have entered into is a profitable one or not. The annual sharing of performance of the financial statement helps them to be insure about the same.
The various related factors of a company are always variable as per the dynamic changes in the surrounding and the market. The growth options keep on coming the way but the company needs to choose the best among the all. The best one can raise maximum amount of investment from the public.
The trust shown by the company in a venture can be converted into reality by asking for finance through different medium and one among them is raising by issuing equity shares to public at large. It attracts a whole lot of white paper work for the company and its promoters. Assuring that the money is going into correct hand the benefit of the same can be shared by company in form of dividend. The return on equity is majorly the dividend. the need of positive return cannot be avoided by the company and it should always work towards the achievement of the same. the income is the ultimate source for rotation of money into the business, a company cannot rely solely on raising loans or equity fund.
Ultimately both are liabilities to the company and in order to maintain the balance between the both, the company needs to be aware about every aspects that can affect the same at present or in long run.
Would you like to read more about this topic? This book might interest you: Crash Course Return on Equity.