# How to Measure Business Success

If you run a business's day-to-day operations, it might feel as if the business is running well, but managers often want verifiable data to measure their successes and confirm the business is running well. One of the best measures of success is a firm's profitability ratios. The main profitability ratios include gross profit margin, return on assets and return on equity. In addition to profitability ratios, a business also might want to compute the growth rate of individual accounts on the business's financial statements. Since these techniques measure financial success, it is imperative the business has an accurate financial statement.

#### 1

Calculate the gross profit margin of the company. To calculate gross profit margin, first subtract cost of goods sold from sales. Then divide by sales. For example, Firm A has sales of $500,000 and the cost of goods sold is $300,000. Therefore, $500,000 minus $300,000 equals $200,000. Then, $200,000 divided by $500,000 equals a gross profit margin of 0.4 or 40 percent. Gross profit margin shows how much of each dollar the company keeps. In our example, for each dollar Firm A takes in, it keeps about 40 cents.

#### 2

Calculate the return on assets. To calculate return on assets, divide net income by total assets. Net income is revenues minus expenses. This number is found on the company's income statement. The company will disclose total assets on the balance sheet. For example, Firm A has net income of $150,000 and total assets of $400,000. Therefore, $150,000 divided by $400,000 equals 0.375 or 37.5 percent. This ratio shows how effectively the company uses its assets in generating revenues.

#### 3

Calculate return on equity. Return on equity equals net income divided by total stockholders' equity. Total stockholders' equity is on the balance sheet. Stockholders' equity shows the amount of money a company receives in exchange for stocks. In our example, Firm A has a net income of $150,000 and stockholders' equity of $200,000. Therefore, $150,000 divided by $200,000 equals 0.75 or 75 percent. Return on equity shows the amount of income generated using stockholders' equity.

#### 4

Compare the ratios with similar firms. Having these ratios provides a good indicator of performance, but does not necessarily reflect how well the firm is performing. To remedy the situation, a company should find the same ratios for similar companies or companies in similar industries. Public companies must disclose their financial statements. This information is found either on the Securities and Exchange Commission's EDGAR database or on individual companies' websites under their "Investors" section. Ratios in a specific industry are also available from sites such as Yahoo! Finance's Industry section.

#### 5

Use the growth rate formula to calculate the percent growth of individual accounts each year. This will give the company an idea if the company is growing or shrinking. The formula for growth rate is the change in the account divided by the original account amount. In the example, Firm A's sales was $500,000 and $400,000 last year. Therefore, $500,000 minus $400,000 equals $100,000. Then, $100,000 divided by $500,000 equals 0.2 or 20 percent. Firm A's sales grew 20 percent from last year to this year.

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Writer Bio

Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.