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What Is Considered a Good Rate of Return?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 01 September 2016
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    Conjecture Corporation
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When it comes to identifying what constitutes a good rate of return, the process often must draw on the collective wisdom of those who function in certain capacities in the business world, particularly those who deal with finance and investing issues. Simply put, there is no universal standard that applies across the board for every type of situation or industry. This often means that in the end, it is the business owner or investor who must decide if a given return on investment can really be considered a good rate of return.

While there is no universal agreement on what amounts to a good rate of return, there are a few factors that do help to at least set the stage for identifying what could be considered a reasonable return on a given venture. The most important of these factors is whether or not the returns are sufficient to offset the expenses associated with the venture during the time frame under consideration. In the event that the profits generated and received during the period do not at least cover all expenses incurred during that same period, that rate of return has no chance of being considered good.

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Typically, a good rate of return must be a certain percentage over and above all the expenses incurred by the investment activity or the business operation. Here, the standards set within the business community will often help determine if the rate of return can truly be considered good or at least acceptable. For example, the industry standard for a rate of return in that particular field may be in the range of 20%. Anything under that percentage is considered unacceptable and serves as the motivation to make changes in the operation that would boost the rate of return into a more attractive range.

In the end, it is the investor or the business owner who must weigh all factors and determine if the profits constitute an acceptable and therefore good rate of return. Even within a given industry, one business owner may consider a rate of return that is less than five percent to be equitable and worth the effort and expense. A different owner operating in the same industry may consider anything under ten percent to be unacceptable. As long as the business is comfortable with the rate of return that is generated within the period cited, then it can in the broadest sense be considered a good rate of return, even when that return is less than what is currently considered the industry standard.

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