Measuring The Performance of Investment Centre
- 2. Outline • Return on Investment • Margin & Turnover • Advantage of ROI • Disadvantage of ROI measure
- 3. Example Widya Mandala’s Company Astrid Division #Net Income = $100,000 #Investment = $500,000 Olyvia Division #Net Income = $200,000 #Investment = $2,000,000 Widya Mandala’s Company
- 4. Return on Investment Is to measure how the company perform (ROI) ROI = operating income/average operating assets Operating income = earning before taxes & interests Operating assets = are all asset acquired to generate operating income, cash, receivables, inventories, land, buildings & equipment Average operating asset = bg. net book value + ed. net value 2
- 5. Example Widya Mandala’s Company Astrid Division $100,000/$500,000 = 0.2 Olyvia Division $200,000/$2,000,000 = 0.1 Widya Mandala’s Company
- 6. Margin & Turnover Margin is the ratio of operating income to sales Turn`over it is found by dividing sales by average operating assets ROI = Margin x Turnover = operating income x sales sales average operating assets
- 7. Examples “My” Company earned operating income last year as shown in the following : Sales $500,000 COGS $200,000 - G.Margin $300,000 Sell& Adm. Exp $250,000 + Operating Income $50,000
- 8. Answer Average operating system = (Begining asset + ending asset)/2 = (270,000 + 320,000)/2 = 295,000 Margin = operating income/sales = 50,000/500,000 = 0.10 or 10% Turnover = Sales/average operating system = 500,000/295,000 = 1.6
- 9. Answer ROI = margin x turnover = 0.10 x 1.6 = 0.16 or 16% Alternatively, ROI = operating income/average operating asset = 50,000/295,000 = 0.17
- 10. Advantages of ROI There are at least 3 positive result from the use of ROI : 1. It encourage managers to focus on the relationship among sales, expense & investment 2. It encourage managers to focus on cost efficiency 3. It encourage managers to focus on operating asset efficiency
- 11. Disadvantages of ROI • It can produce narrow focus on divisional profitabilityat the expense of the profitability for the overall firm • It encourage managers to focus on the short run at the expense of the long run
- 12. bibliography
Editor's Notes
- #6: From this result Astrid perform better than Olyvia, although Astrid income is lower than Olyvia , they could perform better with lower capital