As a company owner in Singapore, you may constantly seek ways to maximise profits and enhance shareholder value. Did you know that one critical metric that reflects your business’s financial health is Return on Equity (ROE)? ROE not only measures how efficiently you utilise your equity to generate profits, but it also signals to investors the effectiveness of your management strategies in the Singaporean landscape.
This article will explore some key strategies to enhance ROE in your enterprise in Singapore.
We will understand
What is Return on Equity?
- ROE is what literally measures how well a company uses its equity to generate profits.
- You can calculate ROE by dividing net income by shareholders’ equity. Since shareholders’ equity is the company’s assets minus its debt, ROE shows how much profit a company can make from its net assets.
- The most important thing is that ROE is an important indicator of profitability and efficiency. A higher ROE means the company is better at using its equity financing to generate income and grow. Also, we always notice that investors tend to look at ROE to assess a company’s financial health, especially when comparing companies within the same industry.
- For example, companies in the tech or retail sectors, which tend to have smaller balance sheets and higher income, usually show a higher ROE, normally above 18%. However, this is different when it comes to utility companies, which carry more assets and debt but lower net income. It will have a lower ROE, around 10%.
- A company with an ROE lower than 10% can be seen as underperforming, while a company with an ROE around or above the S&P 500 average is viewed more favourably. However, what is considered a good or bad ROE really depends on the industry average.
- It is like this: if a company has an ROE of 18% and its peers average 15%, the company is likely seen as performing better than average at using its equity to make profits. Around the globe, investors usually use this metric to evaluate management’s effectiveness in creating returns.
- In the purest sense of the word, ROE helps paint a picture of how well a company can turn the money it has raised from shareholders into profit.
Key Strategies to Improve Return on Equity of an Enterprise
Increasing Revenue
Increasing revenue is the most popular way to improve a company’s return on equity, as it directly boosts profitability.
When a business increases its income, it enhances its ability to generate profits from its existing equity base, which leads to a higher ROE.
You can always drive revenue growth through several strategies. One effective method is improving marketing efforts. By creating stronger campaigns, reaching new audiences, and increasing brand awareness, a company can attract more customers, resulting in higher sales. Expanding product lines is another powerful approach. When a business offers more products or services, it taps into new customer needs and opens up additional revenue streams.
This helps diversify income sources and reduce dependence on a single product, ultimately boosting profits. Entering new markets is also crucial for increasing revenue. When a company moves into new geographic regions or sectors, it can reach untapped customer bases and increase its sales potential.
As sales grow, the company generates more income from the same amount of equity. This increases the return shareholders receive on their investments. If they can focus on revenue growth, a company can become more efficient at turning its equity into profits, which improves its overall financial performance.
Using Financial Resources Wisely
How can using financial resources wisely help improve a company’s return on equity? Let us explain this.
One key strategy is the smart use of debt to fuel growth. When a company uses debt effectively, it can expand its asset base without needing to raise more equity. This keeps shareholders’ equity stable while allowing the company to pursue new opportunities.
If the return on the borrowed money exceeds the cost of debt, the company can boost its profits and, in turn, its ROE. For example, a business may take out a loan to invest in new equipment, expand its operations, or enter new markets. If these investments lead to higher revenues and profits, the company generates more income while keeping equity intact. This means the returns generated from those borrowed funds flow back to shareholders without diluting their ownership.
The key here is ensuring that the cost of borrowing, like interest rates, is lower than the potential return from these investments. If a company borrows at 5% but generates a 10% return from the investment, it has successfully used debt to enhance profitability and ROE.
On the flip side, if the cost of debt is higher than the returns, it could hurt financial performance. This is why wise management of financial resources is critical.
Enhancing Product Pricing Strategy
No doubt that is a powerful strategy. Do you know how this works?
When they use value-based pricing, companies can charge customers based on the perceived value of their products rather than just the cost of production. This strategy helps businesses to increase their profit margins because they are aligning prices with what customers are willing to pay.
Specifically in Singapore, where consumers are willing to pay a premium for quality, innovation, and brand reputation, value-based pricing can be very effective. When a company becomes more profitable, it generates more income from its existing equity, leading to a higher ROE.
In addition to value-based pricing, improving price positioning is another way to drive profitability. Companies can evaluate their market and competitors to find the optimal price point that balances demand with profit margins. In Singapore’s highly competitive industries like retail and services, setting the right price can attract more customers while still keeping profit margins healthy.
Increasing Asset Turnover
At this point, we discover how ROE focuses on using the company’s assets more efficiently to generate higher sales.
Asset turnover measures how well a business uses its assets, like equipment, inventory, or property, to produce revenue. The higher the asset turnover, the more revenue the company creates with its existing assets, which boosts profitability. When a business increases sales while keeping the same level of assets, it improves its revenue relative to the size of its assets. This directly leads to higher profits without needing to raise more equity, ultimately improving ROE.
For example, a company can increase asset turnover by better managing its inventory, reducing idle assets, or speeding up production cycles. When a business keeps its assets working and productive, it generates more income from the same resources.
This increases sales without needing to invest in more assets.
Another way your business in Singapore can improve asset turnover is by optimising your operations. This means streamlining production processes or improving supply chain management helps your company get more output from your existing assets, allowing you to generate higher sales.
As it indicates, by using these methods to make the most of their assets, companies improve efficiency and profitability. As sales grow, the business earns more profit from the same amount of equity, leading to a higher ROE. Isn’t it a wise strategy?
Reducing Tax Liabilities
According to the World Bank, tax rates for businesses have a significant impact on their profitability or net income.
This is why most companies consider reducing tax liabilities as a key strategy for improving a company’s ROE. If they can pay less in taxes, a company can keep more of its earnings, which increases profitability and boosts ROE.
All over the world, businesses use various tax-efficient strategies to lower their tax burden. One common method is taking advantage of available tax deductions and credits, such as research and development (R&D) tax credits or depreciation deductions on assets. These reduce the taxable income, which means the company pays less in taxes.
Another strategy is structuring business operations in a way that minimises taxes. For example, multinational companies might operate in countries with lower tax rates or make use of tax treaties between nations to reduce their tax obligations.
Companies can also benefit from tax incentives offered by governments for specific activities like investing in green technologies or hiring more employees. If they can consider employing these strategies, businesses can reduce their tax bills and increase net income. As a result, more income flows to the bottom line without needing to raise additional equity or take on more debt. This higher net income increases the return shareholders receive on their equity investment, improving ROE.
In one way, tax-efficient planning ensures that the company complies with tax regulations while minimising unnecessary costs. In another way, if they keep more of their earnings and strategically manage taxes, companies can maximise the value they deliver to shareholders. What are your thoughts on this?
Improving the Return on Equity of Your Enterprise with Technological Assistance
Yes, it is indeed a concern of yours to improve return on equity, as various strategies are there in the scenario. Have you ever thought of opting for technological assistance for this? Employing advanced tools like data analytics, automation, and AI enhances decision-making and efficiency. One key way to boost ROE is by accurately measuring asset turnover through powerful solutions like Enterprise Asset Management (EAM) systems from a reputed supplier. This may be the first step you need to take today for the ‘tomorrow’ of your business.
