Chapter8 - Return on Invested Capital and Profitability...

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8 CHAPTER Return on Invested Capital and Profitability Analysis
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Joint analysis is where one measure is assessed relative to another Return on invested capital (ROIC) is an important joint analysis Return on Invested Capital Importance of Joint Analysis
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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
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Return on Invested Capital Application of ROI (1) measuring managerial effective- ness (2) measuring profitability (3) earnings forecasting (3) Measure for planning and control ROI is applicable to:
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Return on Invested Capital Measuring 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
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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
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Return on Invested Capital Measurement for Planning and Control ROI assists managers with: • Planning • Budgeting • Coordinating activities • Evaluating opportunities • Control
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Components of ROI Definition Return on invested capital is defined as: capital Invested Income
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Components of ROI Invested Capital Defined • No universal measure of invested capital exists • Different measures of invested capital reflect different financiers’ perspectives
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Components of ROI Alternative Measures of Invested Capital Common Measures: Net Operating Assets Stockholders’ Equity
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Components of ROI
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