Return on invested Capital CHAPTER
8 CHAPTER Return on Invested Capital
Return on Invested Capital Importance of Joint Analysis Joint analysis is where one measure is assessed relative to another Return on invested capital(ROl) is an important joint analysis iL
• Joint analysis is where one measure is assessed relative to another • Return on invested capital (ROI) is an important joint analysis Return on Invested Capital Importance of Joint Analysis
Return on Invested Capital ROI Relation .ROI relates income, or other performance measure to a companys level and source of financing Rol allows comparisons with alternative investment opportunities riskier investments are expected to yield a higher ROI .ROI impacts a companys ability to succeed, attract financing, repay creditors, and reward owners
Return on Invested Capital ROI Relation •ROI relates income, or other performance measure, to a company’s level and source of financing •ROI allows comparisons with alternative investment opportunities •Riskier investments are expected to yield a higher ROI •ROI impacts a company’s ability to succeed, attract financing, repay creditors,and reward owners
Return on Invested Capital Application of Rol ROI is applicable to: evaluating (2) managerial assessing effective profitability ness (3) (4) earnings planning and forecasting control
Return on Invested Capital Application of ROI (1) evaluating managerial effectiveness (2) assessing profitability (3) earnings forecasting (4) planning and control ROI is applicable to:
Return on Invested Capital Evaluating Managerial Effectiveness Management is responsible for all company actIvities ROI is a measure of managerial effectiveness in business activities RoI depends on the skill, resourcefulness, ingenuity, and motivation of management
Return on Invested Capital Evaluating Managerial Effectiveness • Management is responsible for all company activities • ROI is a measure of managerial effectiveness in business activities • ROI depends on the skill, resourcefulness, ingenuity, and motivation of management
Return on Invested Capital Measuring Profitability Roi is an indicator of compan profitability ROl relates key summary measures: profits with financing Rol conveys return on invested capital from different financing perspectives
Return on Invested Capital Measuring Profitability • ROI is an indicator of company profitability • ROI relates key summary measures: profits with financing • ROI conveys return on invested capital from different financing perspectives
Return on Invested Capital Assists in Forecasting Earnings ROI links past, current, and forecasted earnings with invested capital Rol adds discipline to forecasting ° ROI helps identify optimisticor pessimistic forecasts Rol aids in evaluating prior forecast performance
Return on Invested Capital Assists in Forecasting Earnings • ROI links past, current, and forecasted earnings with invested capital • ROI adds discipline to forecasting • ROI helps identify optimisticor pessimistic forecasts • ROI aids in evaluating prior forecast performance
Return on Invested Capital For Planning and Control ROI assists managers with: · Planning Budgeting Coordinating activities Evaluating opportunities Control
Return on Invested Capital For Planning and Control ROI assists managers with: • Planning • Budgeting • Coordinating activities • Evaluating opportunities • Control
Components of Rol Definition Return on invested capital is defined as ncome Invested capital
Components of ROI Definition Return on invested capital is defined as: Invested capital Income
Components of ROL Invested Capital Defined No universal measure of invested capital exists Different measures of invested capital reflect different financiers perspectives
Components of ROI Invested Capital Defined • No universal measure of invested capital exists • Different measures of invested capital reflect different financiers’ perspectives
