Pretax Return on Revenue
A return on revenue (ROR) is a means of measuring the company’s profitability from one year to another in order to determine if the company is doing well in the business industry by using a simple formula. This is calculated by means of dividing the net income without interest to the revenue. In terms of insurance figures of pretax return on revenue, this is done by dividing the operating earnings without interest and taxes by the net premiums earned. The only difference between the revenue and the net income is the expenses in such a way that the increase in ROR will describe that there are less expense to a greater net income. Through this, it is possible to identify and recognize the expenses made by the company in the business. This method is usually used by moist companies in order to determine the changes when it comes to the company’s profitability from period to period such as a yearly analysis.
The main goal of many companies is to increase to its heights the profits from one period to another. While taking into account that the net income itself provides the idea if the goals are being achieved though it does not give the whole picture of it. By the resulting quotient of the net income and the revenue, it is now possible to view the expenses obtained during that certain period and also determine how these expenses created impact on the income. In short, this method is being used by the company to determine if income return is increased, stayed the same as the usual or decreased from the previous time compared to last year and even to certain period of like 7 years ago.
What company owners want to see is the flow of the business which will indicate of at least a small increase in the revenue’s return. If the figure will show an increase more than the previous period, it clearly shows that the company’s expenses are facilitated efficiently and is producing outstanding net profit. If in event that the figure will show that there is a decrease on the return on revenue, this is a concrete sign that the expenses made by the company are not being managed well as time past. These pieces of information may provide the company a greater picture of the expenses that needs to be minimized without a stake of damaging the good quality of the products or the decline of meeting the demands of the customers in terms of production level.
Most of the companies usually compare its return on revue from one year to another. In some businesses, this kind of comparison may be done on semi-annual basis to allow the business see its status from six months to another 6 months. Depending on the company’s choice on the period, return on revenue is such an important factor to determine if business is taking its step forward and if there are certain aspect in the operation of the business that should be addressed before the total drop down occurs.