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What Are the Different Ways to Increase Return on Equity?

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  • Written By: Carrieanne Larmore
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 28 September 2016
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Different ways to increase return on equity include increasing sales turnover, increasing profit margins, switching to cheaper financing options, and reducing tax obligations. Increasing sales turnover should result in an increase in profits, which will increase the overall return on equity. If the business is unable to increase sales, then it should look into widening its profit margins so that it makes more money per sale. Switching to cheaper financing options can increase a business’s return on equity by lowering its debt obligations. Finding ways to lower a business’s taxes will increase return on equity since the calculation is based on profit after taxes.

The best way to increase return on equity is to find a way to sell more of the business’s products or services. While this seems like an obvious option, not all businesses are positioned to accomplish such a task. A business should invest into research and marketing in order to find out how it can use its strengths and overcome its weaknesses. It may find that tweaking the design, increasing the quality, or adding a feature can result in a significant increase of sales.

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When it is not possible to increase sales, the business can find ways to widen its profit margins. This can be accomplished by changing the product design, finding new suppliers, changing the packaging, or reducing costs of production. An alternative to cutting costs is finding ways to increase the product's value, so that consumers are willing to pay more. This can include adding more features for an increased price and adopting marketing strategies that will change consumer perceptions of the product or company. Strengthening a brand name often results in the business being able to raise its prices, which will increase the profit margins and return on equity.

Using cheaper financing options is another method to increase return on equity. Especially if the business borrowed money during an economic decline, it may be paying more in interest rates than what is currently offered. If the business has the available finances, it could pay off debt early and then apply for debt under new rates. During a recession or depression, businesses should borrow only what is absolutely needed and then wait until rates are better. A businesses should be sure to consider all of its options, such as using owner equity or leasing.

Reducing tax obligations can increase return on equity, though this is not always an option for most businesses. Some industries enjoy more tax breaks and incentives than others. It is best for the business to meet with an accountant who has experience with handling clients in their specific industry to see what options are available. For instance, businesses in information technology (IT) receive a lower tax rate in the US since the government wants to encourage investment within this field.

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