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Net returns are the funds that remain after all expenses associated with an investment are settled. Any remaining income that results from the ownership of the asset in questions is classed as a net return, referring to the fact that those remaining funds constitute what the investor has earned above and beyond the fees and other expenses that are associated with the asset. The term is also used to refer to the net income that a business realizes once operational costs and other relevant business expenses is deducted from the gross income generated by the company.
The basic idea behind determining net returns is to evaluate the capital gains that the company or investor has achieved as a result of his or her efforts. With an investment, identifying the amount of income generated by holding an asset can make it easier to determine if the investor should continue to retain possession of the investment, or replace it with something that shows more promise. Monitoring net returns from assets retained in a portfolio make it easier to identify when an investment is beginning to decrease in its value to the investor, look into the reasons for the decline in returns, and take appropriate action to avoid incurring a loss.
With company revenues, understanding the current status of net returns is extremely important. Simply put, if the income generated from the business effort is not sufficient to cover all operational costs and still produce at least some amount of net returns, then the business must make changes in order to survive. Those changes may involve anything from slashing operational expenses to lowering the retail prices for the goods and services offered in a bid to become more competitive in the marketplace. As long as the net returns remain healthy, the company is able to not only meet its expenses but also use a portion of those returns to reward employees, initiate expansion plans, or set aside funds for future projects.
When calculating net returns, one approach is to include all types of expenses related to the investment or the company operation. This would include allowing for expenses such as income tax or capital gains taxes. Other approaches omit taxes from the calculation, although those expenses still have to be accounted for at some point in order to determine how much money the effort has earned that is truly free and clear of any type of associated debt obligation.
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