How To Increase ROE in BSG

BSG standards expect you to maintain an ROE of 15% annually. Considering that ROE is not the only factor learners should win over to secure a top score, students often get overwhelmed with the constant demand to balance all ratios.

Thanks to this guide, our BSG experts provide tips to increase ROE. So, whether you’re new or advanced in the business strategy game, you can apply them to improve your score. And in case you get stuck adjusting the return on equity ratio, you can ask for professional guidance from a reliable BSG help team!

What Is ROE?

Also known as return on equity, ROE is defined as net income divided by the shareholder’s equity. This ratio shows how the shareholders’ money maximises the company’s profitability.

An increase in the ROE proves that the management has effective strategies that enable the company to generate income without seeking more capital. In contrast, a constant decrease in return on equity shows the company is headed to a financial crisis.

High ROEs also attract investors to put their money into the company as they are confident in the management’s ability to generate high profits.

While it’s not the only measure of a company’s financial performance, ROE gives an overview of your company’s profitability over the long term. Hence, your ROE impacts your BSG score to a significant level.

So, how do you find ROE?

To calculate the Return on Equity, use this formula:

ROE = Net Income/Shareholder’s Equity * 100

For example, if your annual net profit is $40,000 and the shareholders’ equity is $480,000, your ROE will be

ROE = 40,000/480,000*100

ROE = 0.08*100

= 8%

Compared to the BSG requirement of 15%, this ROE value is less by 7%. If you’re in this position, you must attend to your net profits, shareholder equity, or any other elements dropping your ROE. Not sure how to improve your return on equity value? Other students get stuck too. So, don’t panic; ask for professional guidance from experienced business strategy game graduates!

An In-depth Look into ROE

As a critical element in the real business world, return on equity measures how well your company can generate revenue, profits, and company growth. Simply put, the higher the ROE, the more satisfied the shareholders are with the management. This may prompt them to invest even more financial resources into the company.

However, it’s important to note that this assumption only works in specific industries, as an increased ROE in some sectors does not translate into growth. It’s also important to note that the generated net profit is not always passed on to the shareholders since the management may decide to reinvest the income. However, they can enjoy the benefits of appreciated stocks.

To find your ROE, divide all your earnings with the average shareholder equity within the accounting period. You can find the income or loss values in the income statement. To get the shareholders’ equity figures, check the balance sheet.

Increasing BSG ROE

Return on equity contains two parts

• Net income
• Shareholders’ equity

So, any change in the net income or the shareholders’ equity will result in an increased or decreased ROE value. The simplest way to increase your return on equity ratio is to raise net income while keeping the shareholders’ equity constant.

Alternatively, you can decrease the shareholders’ equity while holding the net income constant. The two actions increase the numerator, giving you a higher ratio than the initial value.

So, how can you adjust these two elements?

1. Increase Net Profit Margin

What’s your company’s net profit margin?

Is it the reason your return on equity ratio is below the BSG requirement?

In our example, the net profit is $40,000, and the shareholders’ equity is $480,000 giving us an ROE of 0.08 or 8%. To increase this value, you can raise your net profit margin from $40,000 to, say, $50,000. This will give us a new ROE figure

ROE = Net income/Shareholders’ Equity*100

= 50,000/480000*100

ROE = 10.4%

Note that the new value is above the initial ROE of 8%, recording a 2.4% increase. Also, the recent return on equity value is closer to the BSG requirement of 15%, increasing your chances of winning BSG.

There are different techniques to achieve a higher profit margin, including.

• Attain above-average market share
• Increase your net sales revenues
• Lower labour costs
• Reduce the operating costs
• Lower the production costs

2. Adjust the Financial Leverage Value

Your company’s leverage value affects your return on equity ratios. To get the leverage ratio, you divide the equity by the debt. An increase in debt will result in an artificial increase in the ROE figure. However, it’s important to note that this does not reflect your company’s actual performance.

Generally, a direct Leverage-ROE relationship applies if the interest costs do not surpass the assets turnover. As a result, you want to maintain your debt amounts at reasonable values that allow you to keep a good leverage ratio.

See the leverage ratios below and what they mean to your business:

• 1.0 leverage ratio shows that your company’s operations are financed by equity. So, there’s no debt which may seem reasonable. But investors will question why your management is not borrowing funds to maximise its profit margins.
• 2.0 leverage ratio means that for every equity dollar, your company owes a debt dollar. This is great for the shareholders, but investors may ask your management to borrow more.
• A 3.0 leverage ratio means two debt dollars for each equity dollar. At this point, you may experience an artificial increase in your net income and ROE. This leverage value meets your investor expectations as they see increased profits.
• 4.0 leverage value shows that your company has three debt dollars for every equity dollar. If your interest payments exceed the net income, your ROE will drop.

3. Reduce your Inventory

After increasing the company profits, we have a net income of $50,000 and shareholders’ equity of $480,000. Assuming that the equity capital provided comprises $400,000 inventory and is above the market demands, you’ll constantly be paying storage fees.

This will reduce your net revenues, lowering your return on equity ratio. However, when you reduce your inventory, you will have more net income divided by the new list to give you a higher ROE.

Let’s express it mathematically;

Say you cut the inventory to $300,000 from $400,000, reducing shareholders’ equity investment to $300,000 plus the remaining $80,000 of the shareholders’ equity to get total equity of $380,000.

This will give you a new return on equity ratio:

ROE = Net Income/Sareholders’ Equity*100

= 50,000/380,000*100

ROE = 13.2%

4. Use Idle Cash

Idle cash may give you false security that you’re performing well. However, you risk squeezing profit margins, affecting your ROE values negatively. Typically when you double production levels, you can increase your unit sales volumes.

If your management has already allocated enough operating profit for the production, you can use the excess cash to:

• Pay dividends to shareholders. Note that the total dividend payments per share should be less than the earnings.
• Repurchase your stocks
• Invest in Total Quality Management to improve your net revenues

5. Lower Taxes

The taxes paid determine the net revenues of your company in the specific accounting period. If the company’s current ratio is 13.2%, with a net revenue of $50,000 and a total shareholders’ equity of $380,000.

Suppose your taxes total $5,000; your pre-tax profit will decrease to $45,000. This will give you a new return on equity ratio

ROE=45,000/380000*100

= 11.8%

You notice that the return on equity ratio decreases from 13.2 to 11.8. However, if you lower your taxes, your net revenue will increase, boosting your ROE value.

Other Business Strategy Game Profitability Ratios

Besides the ROE, here are other profitability ratios in the business simulation content;

• Operating Profit Margin

The operating profit margin is the operating profits divided by the net revenues. Usually, the net revenues generally come from footwear sales after the exchange rate adjustments and the discount offers. A higher operating profit margin shows such companies are cost-competitive. It’s also important to note that a bigger percentage translates into a bigger margin for covering interest payments.

• Earnings Per Share

Also known as EPS, earnings per share is the net income divided by the shareholders’ shares of stock. Earnings per share is one of the five performance measures BSG uses to grade you and rival companies. As a result, you should pay keen attention to maintaining a good EPS value with an attractive yield compared to the other teams.

You can boost your Earnings per share by strategizing to increase your net income. Alternatively, you can repurchase shares of stock to reduce the shareholders’ equity. These two actions enable you to increase and decrease the numerator and denominator, respectively.

• Net Profit Margin

Net profit is defined as net income divided by net revenue. Net income is equal to net profit, and the net revenues represent the cash you get after footwear sales and discount deductions. The bigger the company’s profit margin, the higher the profitability.

More BSG Financial Ratios

BSG rating does not rely on profitability ratios solely. It has other financial metrics, including operating ratios, credit rating ratios, dividend ratios, and liquidity ratios.

Liquidity Ratio

BSG uses the current ratio to measure your liquidity. The current ratio is defined as the current assets divided by current liabilities. This value shows your company’s ability to generate sufficient cash to cover your current liabilities.

Operating Ratios

• The total production costs to net sales revenues ratio is defined as the total production costs divided by net revenues.
• The total marketing costs for cameras to net sales revenues ratio is obtained by dividing total marketing costs by net revenues.
• The percentage of camera-delivery costs to net sales revenues ratio is defined as total delivery costs divided by net revenues.
• The percentage of total administrative costs for cameras to net sales revenues ratios is obtained by dividing administrative costs by the net revenues.

Credit Rating Ratios

Your company’s credit rating is measured through the following ratios

• The time-interest-earned ratio is the operating profit divided by net interest for the last four quatres. This ratio measures whether your company’s profits can cover annual interest payments.
• The debt-equity ratio is the long-term debt divided by shareholders’ equity.
• Debt payback capability or default risk ratio is defined as free cash flow divided by (net income+depreciation – total dividend payments).

Dividend Ratios

• The dividend yield ratio is defined as the dividend per share divided by the company’s stock price. This ratio shows what a shareholder will receive if the company purchases shares at the current stock price. A dividend ratio below 2% is considered low, while a value above 5% is high and meets most investors’ expectations, especially those looking for stock that will generate sizable dividend income.
• The dividend payout ratio is total dividend payments divided by net profits. This ratio represents the percentage of earnings once taxes are paid out to the shareholders. Generally, your company’s dividend payout ratio should be below 75% of the Earnings per share. This condition holds except when your company has paid off most of its debts and has enough free cash flows to fund growth.

To win the BSG game, you must ensure all ratios are close, exact, or above the required value. This will improve your company’s performance, keeping you ahead of rival companies. And suppose you get stuck accomplishing the required company’s dividend payout ratio or credit rating, don’t hesitate to ask for help from BSG experts.

Let’s Increase Your ROE!

Companies signal good efficiency when they achieve a high return on equity ratio. But what happens when you can’t develop a cost-effective marketing strategy to increase your earnings or when you can’t decrease the shareholders’ equity?

Worry not, because your BSG expert team got you covered with reliable BSG ROE service. Whether you’re experiencing constantly falling ROE or can’t hit the required 15%, our professionals can help you achieve the desired results.