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This is how you determine the profit from an Return on capital employed
If you want to invest money, the profitability - i.e. the expected financial success - of investments such as stocks or bonds plays an important role. In this context, the return on an investment is also discussed. Here you can find out what is behind it and how you can calculate the return using a simple formula.
What is Yield?
This is the return on capital that you can achieve with an investment. The return is usually determined annually and given as a percentage. This makes it possible to compare different forms of investment in terms of their potential. Yield and interest are not identical. Because the interest rate only indicates the amount of interest on an investment and not the total return that you can achieve within a certain period of time. The total return depends not only on the interest rate, but also on other factors such as the price development. While interest income is a return, there are returns, such as dividend yields, that are not derived from interest.
yield formula
The return shows the relationship between the profit achieved and the capital employed. You can determine the return on an investment using a simple basic formula: profit x 100 / capital employed = return in percent. For example, if you invest $5,000 and make a profit of $500, your return is 10 percent.
Gross and Net Return
There are different types of returns on an investment. The term gross return describes the return on capital before taxes and inflation, i.e. the nominal interest income. However , if tax deductions and inflation are taken into account, it is the net return. This expression therefore describes the actual profit from your investment and is therefore always lower than the gross return.
When calculating the net return, the costs must also be deducted:
[(profit - costs / capital employed) - 1] x 100 = net return in percent. For example, if you have invested EUR 4,000 and receive EUR 4,550 after one year, assumed costs of EUR 200 have already been deducted, your net return is [(EUR 4,550 - EUR 200 / EUR 4,000) - 1] x 100 = 8.75 percent.
These forms of investment can offer attractive returns .
There are various ways to still generate attractive returns today – for example with shares . While these can regularly yield income through the annual dividend payment, bonds generally receive interest payments every year. Profits can also be made by selling securities . However, falling prices can also result in losses. In order to reduce the individual risks of securities, it makes sense to invest in investment fundsto create. In this way, you can spread your invested capital over a large number of securities and thus spread the individual risks better. As a rule, when investing, the prospect of higher returns also entails a higher risk. In principle, every investor has to decide for himself whether the focus of his investment is on the security of the capital investment or on a higher earnings potential.
Dividend and Rental Yield
If you invest your money in stocks, for example, you can benefit from a rising stock market price. In addition, an investor usually receives a share in the profits of a company as the owner of company shares. This portion is called a dividend. The formula for dividend yield is as follows: Dividend / Share Price x 100 = Dividend Yield Percentage.
A rental yield is the income from buying and renting a particular property at the same time. Various key figures are available to buyers/investors to calculate the rental yield:
- Gross Rental Return
- net rental yield
- Rental price multiplier
- return on equity
- return on property
The gross rental return can be calculated as follows: (gross rental income per year / purchase price) x 100 = gross rental return in percent. With the gross method, the rental yield is usually between 2 and 5 percent. The net rental yield provides a more precise decision-making aid: (annual net rental income / purchase price plus ancillary costs) x 100 = net rental yield in percent. Buyers/investors should also include ancillary costs such as real estate transfer tax , land register costs, notary costs and brokerage commission in their calculations .
Return on equity and property
In order to find out whether a purchase price is fair, prospective real estate buyers can also use the rental price multiplier. The formula here is: (purchase price including ancillary and modernization expenses / annual cold rent) = rental price multiplier. A score of 25 or lower is considered favorable. The return on equity puts the capital employed in relation to the profit and shows how efficiently the available equity is used and how the capital employed yields annual interest. Return on Equity can be calculated using a simple formula: (Annual After Tax Net Income / Equity) x 100 = Return on Equity Percentage.
The return on property enables an assessment of whether it is worth using more outside capital and less equity for financing. In order to calculate the return on the property, you need information on the purchase price and ancillary purchase costs, the annual net rent, the running costs and taxes. Formula for calculating the property return: (annual net rent - annual costs for reserves, administration and non-recoverable additional costs - taxes) / purchase price including additional acquisition costs x 100 = property return.
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