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Return on Investment (ROI) Formula

Next Page Click Here. Net operating income Average operating assets . ROI = . Return on Investment (ROI) Formula. Income before interest and taxes (EBIT). Cash, accounts receivable, inventory, plant and equipment, and other productive assets. Next Page Click Here. Net operating income

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Return on Investment (ROI) Formula

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  1. Next Page Click Here Net operating income Average operating assets ROI = Return on Investment (ROI) Formula Income before interest and taxes (EBIT) Cash, accounts receivable, inventory, plant and equipment, and other productive assets.

  2. Next Page Click Here Net operating income Average operating assets ROI = Net operating income Sales Margin = Sales Average operating assets Turnover = Margin  Turnover ROI = Return on Investment (ROI) Formula

  3. Next Page Click Here $30,000 $200,000 =15% ROI = Return on Investment -Illustration Regal Company reports the following: Net operating income $ 30,000 Average operating assets $200,000 Sales $500,000

  4. Next Page Click Here Net operating income Sales Sales Average operating assets ROI = × $30,000 $500,000 $500,000 $200,000 ROI = × ROI = 6%  2.5 = 15% Margin  Turnover ROI = Return on Investment -Detailed Calcuation

  5. Next Page Click Here Controlling the Rate of Return Three ways to improve ROI . . . Reduce Expenses Increase Sales Reduce Assets

  6. Next Page Click Here Controlling the Rate of Return • Assume that Regal’s manager was able to increase sales to $600,000,which increased net operating income to $42,000. • There was no change in the average operating assets of the segment. Let’s calculate the new ROI.

  7. Next Page Click Here Net operating income Sales Sales Average operating assets ROI = × $42,000 $600,000 $600,000 $200,000 ROI = × ROI = 7%  3.0 = 21% Margin  Turnover ROI = Controlling Return on Investment Sales (and operating income) increased;ROI increased.

  8. Next Page Click Here In the absence of the balanced scorecard, management may not know how to increase ROI. Managers often inherit many committed costs over which they have no control. Managers evaluated on ROI may reject profitable investment opportunities. Criticisms of ROI

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