PERFORMANCE MEASURES1Module 5 – SLPACC501 – Accounting for Decision MakingIntroductionPerformance measures are processes that communicate goals that have been aligned by organizations. This is a process that is used to collect and to report information regarding the performance of the organization during a specified time period. To do this the management can look at processes or strategies that are put in place and if the outcome of these processes falls in line with what the organization intended. Good performance is what the organization wants to see but bad or poor performance can also be useful to the organization so changes can be made to get the desired results. In this paper I will discuss the performance measures of Return on Investment (ROI), Operating Leverage, Economic Value Added (EVA), and Earnings per Share (EPS) for the Peerless Systems Corporation. Each of these performance measures is different in nature and shows a side of how the organization may be doing during a specific time period. The
PERFORMANCE MEASURES2information I will be using for this paper is taken from the Form 10-K filing for the Peerless Systems Corporation for the fiscal year ended January 31, 2012.Return on Investment (ROI)Return on Investment is defined as a performance measure that is used to evaluate the efficiency of an investment or to compare the efficiency of several different investments . The formula to calculate a ROI is as follows:ROI = (Gain from Investment – Cost of Investment) divided by the Cost of Investment. This calculation can be modified to fit the situation depending on what the analyst includes as returns and costs . In this instance, to figure the ROI the following figures are used Gain from Investment (3650) – Cost of Investment (2924) divided by the Cost of Investment (2924), the following chart shows how this looks.Exhibit 1 - ROIROI = Gain from Investment - Cost of InvestmentCost of Investment (all dollar amounts are in thousands)3650 -2924726292429240.25 or 25% ROI
PERFORMANCE MEASURES3When an investor invests commits money on an investment they expect to get a return on the positive side, but they realize that there may be a negative return. A positive return shows that the investor made money on the investment, as the above example shows a positive return of 25% on the investment. There is always a risk involved with investments too. A risk is simply the chance that the investor will lose money on the investment . In general terms, a high risk investment yields higher returns than low risk investments. Investors know this and most are willing to take a gamble to get a higher return on their investments. Advantages and Disadvantages of ROIThe ROI method is simplistic in use and it is very easy to apply the formula to see the average earnings on an investment. Company managers and investors alike use this method to analyze the business’s performance . Because ROI is simple to use it encourages managers to focus on earnings in relation to assets which benefits the organizations bottom line .