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Return On Invested Capital and Profitability Analysis
Return On Invested Capital and Profitability Analysis
Return On Invested Capital and Profitability Analysis
8
CHAPTER
8-2
ROI Relation
• ROI relates income, or other performance measure,
to a company’s level and source of financing
Application of ROI
ROI is applicable to:
• Management is
responsible for all
company activities
Measuring Profitability
• Planning
• Budgeting
• Coordinating activities
• Evaluating opportunities
• Control
8-8
Components of ROI
Income
Invested Capital
8-9
Components of ROI
• No universal measure
of invested capital
• Different measures of
invested capital reflect
user’s different
perspectives
8-10
Components of ROI
• Stockholders’ Equity
8-11
Components of ROI
RNOA:
measures operating efficiency/
performance
reflects return on net operating
assets (excluding financial
assets/liabilities)
8-12
Components of ROI
Components of ROI
Components of ROI
Components of ROI
NOPAT
(Beginning NOA + Ending NOA) / 2
Where
• NOPAT = Operating income x (1- tax rate)
• NOA = net operating assets
8-16
Components of ROI
BALANCE SHEET
Operating assets ..................... OA Financial liabilities .................. FL
Less operating liabilities ........ (OL) Less financial assets ............. (FA)
Net financial obligations......... NFO
Stockholders’ equity................ SE
Components of ROI
Where
• Equity is stockholder’s equity less preferred
stock
8-18
OA = operating assets
OLLEV = operating liabilities leverage ratio
(operating liabilities / NOA)
8-20
NOPAT
Operating profit margin (OPM) =
Sales
Disaggregating ROCE
8-31