Return on Equity (ROE) is the one metric that you can use to compare your business to any other business or investment you might own.
It measures the profit you make as a percentage of the investment (equity) you leave in your business.
All other business metrics can’t be compared apples to apples. For example, Net Profit will look different for different niches (e.g. commercial maintenance vs general contractor vs fertilizer company).
ROE is a metric you can use to compare and contrast all your investments e.g. in the stock market, in real estate, etc.
You can also use that metric to compare you to your peers.
How Do You Compare?
Last week I held my second annual Financial Master Class (a huge success with 205 attendees) and one metric we looked at is ROE.
in 2020 (two years ago) the average ROE was 41%, and the top 20 percent of participating companies achieved an average ROE of 75% (and the very top company hit 108%.)
This past year in 2021, the average ROE fell to 29%, and yet the top 20 percent of companies grew, achieving an astounding 119% ROE.
We found that while sales and equity rose dramatically year over year, the net profit fell slightly on average. This could be due to inflation, manpower issues, or simply production got outstripped.
Having said that, the top performers (top 20 percent of companies) did substantially better in 2021 than the year before.
For the best in our industry, this was their best year ever!
I raise up the issue of ROE because right now many people are thinking of selling their companies.
They are thinking, “Let’s get out while the going is good”, or “Let’s get out because I want to go do something else.”Let's get out while the going is good, or Let's get out because I want to go do something else. Click To Tweet
Is It Time To Sell?
Ultimately you have to decide the right timing. But I want to discuss what you will do with your “winnings”.
Once you sell, you have to take your proceeds and invest them somewhere else.
Where will you put them?
Ironically, the best investment you probably ever had (or should have ever had!) is your own business. (If it’s not, call me!)
You won’t get a steady high ROE in the stock market. Not even close. You might get it in another business like real estate.You might get it in another business like real estate. But either way, you need to put your winnings somewhere. Click To Tweet
But either way, you need to put your winnings somewhere.
Your Challenge: Is Twofold.
- As you develop your exit plan, you also need to develop an “entrance” plan for what you plan to do with not only your time but also your money.
- If you decide to stay in your business, you have to embrace the challenge to continue to reinvest money back into your business and continue to gain a high ROE.
Some of you have the former challenge, most of you have the latter challenge!
Make this investment in your own business the best investment you have ever made.
P.S. Related to scaling your business, especially if you are looking for freedom as an owner, consider joining me in my upcoming virtual event, Develop Your Second In Command.