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Unformatted text preview: RETURN ON INVESTMENT Two Ways to Calculate Return On Investment Return on investment or ROI = Net Income ÷ Investment. An alternative formulation of ROI based on Du Pont's formula is as follows: ROI = (Capital Turnover Ratio)(Profit Margin on Sales) = (Sales ÷ Investment)(Net Income ÷ Sales) The Capital Turnover Ratio (CTR) reflects management's ability to generate sales from a given investment base. Note that the source of the investment (i.e., debt or stockholders equity) is usually considered irrelevant, but see alternatives below. The Profit Margin is the Rate of Return on Sales (ROS) and measures management's ability to control the spread between prices and costs. Productivity and cost control are reflected in this measure as well as other factors such as the sales level. A more detailed view of the Du Pont ROI formula appears in the graphic illustration below 1 . Methods of Increasing ROI ROI may be increased in various ways. Some possibilities include the following. 1. Increasing Capital Turnover (CTR).1....
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This note was uploaded on 04/03/2012 for the course ACCT 325 taught by Professor Warren during the Spring '08 term at Rutgers.
- Spring '08