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What's your company's true profit?
You've invested plenty of capital in your business. Use the calculator below to estimate how hard it's working for you.
By Patricia B. Gray
What are the total assets of your business? (Include the total value of the cash, inventory, receivables, equity, real estate, equipment, machinery, etc., that your firm holds, but do NOT subtract debt.)
What are your accounts payable? (In other words, how much money your company owes its creditors, employees, and suppliers at this moment.)
What industry are you in?
If the industry you're in isn't listed above, estimate your cost of capital. To do so, consider how outside investors and bankers would gauge the risk of your venture.
For relatively low-risk ventures (such as retail or consumer-goods firms), estimate a cost of capital of 8%.
For average-risk ventures (think industries such as hospitality or media), estimate a cost of capital of 10%.
For high-risk fields - such as biotech and other technology firms - estimate a cost of capital of 12%.
For comparison, cost of capital for the industries above range from 6.5% (Utilities) to 15.6% (Semiconductors).
Enter your estimated cost of capital
What's your company's true profit? Here's an estimate.
Your true profit is:
Based on earnings before interest and taxes (Ebit) of
And a cost of capital for
Good work. That means your company is generating a true profit. But don't get too comfortable: It's important to focus on boosting your business's true profit over time. Generate your true profit results over three years. If the numbers show improvement - congratulations, you're making smarter decisions about your company's use of capital each year. If not, it may be time to make some changes.
Uh-oh. That means your company is generating a true loss - and you might be making more on your money if you put it into another business. But don't be discouraged. Just focus on continually improving your true profit over time by making better decisions about your company's use of capital. Strive to shrink the loss - or swing to a profit - next year.