International business: scope, strategies, and global operations

Return on equity (ROE) is the term that is used to indicate the extent of value / profit that the shareholder receives on his economic input into the company. A high return on equity shows that the company is using its money well not wasting it on unnecessary appendages but making a profit rather than creating a loss. Investors, therefore, would be drawn to companies that premise and demonstrate high ROEs

A practical example of an ROE is if you owned a business that had a shareholder's equity (i.e. net worth) of $100 dollars and it made $34 million in profit, it would be earning 5% on your equity. In this case, the return on your equity is 5%.

The internal rate of return (IRR) is a rate of return used in budgeting to measure and compare the profitability of investments. The IRR also appears by other terms such as "the discounted cash flow rate of return" or "the rate of return." It is known as 'internal' since individuals when calculating the IRR includes only the internal features of the organization in his calculation not external / environmental characteristics such as the fiscal interest rate or inflation. The IRR is a theorem that is used to assess the sort of investments or projects that the individual should invest in, in other words the individual uses the IRR in order to decide which projects or investments to select. The higher a project's internal rate of return, the more potentially beneficial and lucrative the project would be.

As regards foreign investments, dabbling with IRR is tricky since, on the one hand the lower tax rates of the country as well as the lower costs of foreign labor may leverage IRR. On the other hand, other aspects, such as unfamiliarity with principles of country and possibly shoddy results may corrupt IRR and may disappoint the company's expectations of IRR exceeding input. The firm, too, may be incapable of managing numerous projects. Most significantly, organizations and shareholders may be familiar with projects that are on their own terrain (local) and thus more equipped to guarantee a higher IRR. Either way, IRR should only be used to decide whether a single project is worth investing in.

The disadvantages of using ROE in foreign investments is that ROE is commonly used to compare businesses that are in the same industry and since countries have different economic variables (socio-political aside from different currency) it would be hard for the shareholder to accurately evaluate his ROE (Stock Market Investors. Web). There is another problem: since ROE consists of three main characteristics - profitability, management of assets, and economic leverage, the manager will need to know how to do the job effectively and get it done in order to show results in each of these three elements. Familiarity with job and involvement with company and its employees is often (although not always) better achieved on local terrain (Essortment: Web).

The formula for Return on Equity is:

The Company's overall (or net) profit is divided by the Average Shareholder Equity for the period. Details of the net income are usually found on the Company's most recent Statement of earning / Balance sheet. The Average Shareholder Equity for the period is the difference between the total assets and total liabilities and can also be found on the statement.