IPPT Chapter 8 ROI numerator: return, denominator: investment. Compare ROI and ROIC. ROI is measuring Total Assets ROI impacts the ability to succeed. ROI= 4,6 %, for $1 investment get 0,046 return. Good ROI attract financing, bcs high ROI means that the company has the ability to pay the loan Application of ROI:1. Measuring managerial effectiveness: input: investment, output: return. How is the efficiency of the company? Note: Efficiency similar input, effectiveness: similar output2. Measuring profitability: how is the company with the high profitability on their annual report but most of it was generated from accrual?3. Measure for planning and control to make strategies which are worked with long term objective of a company. Ex: target ROI 4,6%:, then the company has to make agreement with marketing division, for example, and other related party (matter of coordination) to achieve the target

COMPONENTS OF ROI1. ROIC = income/invested capital.Or, alternative measures of invested capitalI:2. Net operating assets (Return on Net Operating Assets (RNOA)) Measures operating efficiency/performance Reflects net operating assets, without including financial assets/liability. Financial assets are called indirect investment, do not reflect investment productive assets3. Stockholders equity (only) only the common equity (Net income preferred dividends)/avg common equity Capture the effect of leverage debt capital on equity holder Without including al debt financing and preferred equity, bcs normally the preferred equity is paid on interests, not based on profit of the company

COMPUTING INVESTED CAPITAL Usually computed using avg capital abailable for the period Typically add beg + end inv then divided by 2 For more accurate computation, average the interim amounts, quarterly/monthly