Firms use these measures to evaluate whether the investment center manager is meeting or exceeding performance expectations, and to allocate available funds to divisions in the most profitable manner.
Return on Investment (ROI) Return on investment (ROI) is a well-known method of assessing the profitability of divisions. ROI is a measure of profitability, as it relates profits to the size of the investment made in the division. This relative measure allows comparisons between divisions of different sizes. Return on investment ( ROI ) measures the gain or loss generated on an investment relative to the amount of money invested. ROI is usually expressed as a percentage and is typically used for personal financial decisions, to compare a company's profitability or to compare the efficiency of different investments. However, ROI has its drawbacks. Where it is used as the primary measure of performance for divisional managers, there is a danger that it will lead to behaviour that is not really consistent with the interests of the business overall.
Return on investment (ROI) is a measure of the profit generated per Ghana cedi/dollar/Pounds/Euro of investment. Return on investment (ROI) is a measure that investigates the amount of additional profits produced due to a certain investment. ROI is considered to be superior to any other performance measurement because it shows the effectiveness of the manager in utilizing the assets at the manager’s disposal. It is calculated as: ROI = ROI = ROI = •
Note When defining divisional profit for this ratio(ROI), the purpose for which the ratio is to be used must be considered. The purpose could be for evaluating the performance of: a divisional manager, the controllable profit is likely to be the most appropriate; a division, the divisional profit for the period is likely to be more appropriate. ROI is an important financial metric for: asset purchase decisions (such as computer systems, machinery, or service vehicles) approval and funding decisions for projects and programs of different types (for example marketing programs, recruiting programs, and training programs) traditional investment decisions (for example management of stock portfolios or the use of venture capital). • Source: Drury, C. and El-Shishini, E., ‘Divisional performance measurement: an examination of potential explanatory factors’, CIMA Research Report, August 2005, p. 32.
Various definitions can be used for divisional investment. assets (non-current assets plus current assets) or the net assets (non-current assets plus current assets less current liabilities). In addition, non-current assets may be shown at their historic cost, or their historic cost less accumulated depreciation, or on some other basis, such as current market value.
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