We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Economy

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What Is Normal Rate of Return?

Esther Ejim
By
Updated: May 16, 2024
Views: 34,075
Share

The normal rate of return is used to describe the rate of loses or gains from an investment. That is to say that it is the calculation of the profits made from an investment after subtracting the capital, investment and operating costs. It is a benchmark that investors use to decide if a business is a worthy investment, or if they should look elsewhere. Businesses also use it to calculate if the business is making any reasonable profits and by what percentage.

This assessment may be used by someone trying to start a new business. The information may be obtained by studying the posted profits of a spectrum for a similar business in the industry, taking into consideration factors like the environment and other issues that may affect that particular business in its proposed location. For instance, a potential watch manufacturing entrepreneur may study the rate of loses or gains for that industry with regards to aspects like government regulations, taxes, import duties and other factors that may affect business profitability. The profit of a business is usually affected by such considerations even if the sales and prices of the products are similar in different markets.

Two companies might make the same product, sell the same quantity per month at the same price, and yet the normal rate of return might be different. This may be due to the locations of the businesses. One of the businesses could be located in an environment where the government grants certain tax concessions and reduces custom duties for some necessary raw materials. Another factor that may affect the rate is if the company is able to hire a cheap work force. The operating cost will be cheaper than another similar company where the environment is not so favorable and leading to higher profits.

In various industries, normal rate of return is also affected and determined by the various unique markets. For instance, an apparel manufacturing industry will have a different rate from a car manufacturing industry. One of the factors that affect how a market might be described as profitable is the risk factor associated with the industry. Industries with higher risk factors typical require a high margin of return before they can be declared profitable, unlike lower-risk markets that may be deemed successful with only a fraction of the same profit.

Share
SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Esther Ejim
By Esther Ejim
Esther Ejim, a visionary leader and humanitarian, uses her writing to promote positive change. As the founder and executive director of a charitable organization, she actively encourages the well-being of vulnerable populations through her compelling storytelling. Esther's writing draws from her diverse leadership roles, business experiences, and educational background, helping her to create impactful content.
Discussion Comments
By anon977008 — On Nov 07, 2014

Would the normal rate of return change over time?

Esther Ejim
Esther Ejim
Esther Ejim, a visionary leader and humanitarian, uses her writing to promote positive change. As the founder and...
Learn more
Share
https://www.smartcapitalmind.com/what-is-normal-rate-of-return.htm
Copy this link
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.