Although ROI is widely used in evaluating performance, it is not
a perfect tool. it is subject to following criticisims :
- Just telling managers ti increase ROI is not enough. managers
may not now how to increase ROI , they may increase ROI in a way
that is inconsistent with the company's strategy or they may take
steps that increase ROI in a short run but harm company in long
run.
- A manager who takes over a business segment typically inherent
many committed costs over which the manager has no control. These
committed costs may be relevant in assessing the performance of the
business segment as an investment but make it difficult to fairly
assess the performance of the manager relative to other
manager,
- A manager who is evaluated based on ROI may reject investment
opportunities that are profitable for the company but that would
have a negative impact on manager's performance evaluation.
- The level of investment or capital employed can be difficult to
measure and this can distort inter-firm comparisons.
RESIDUAL INCOME IS A BETTER INDICATOR THAN ROI :
It is another measure of performance evaluation based on
investment in assets. It compares the profit actually earned to the
minimum level of profit required for the business. It is profit
earned less interest o minimum return on the capital that has been
employed to generate the profit. It is considered a better method
because it is an absolute measure as it measures in terms of money
rather than in terms of percentage. It is ideal for comparisons
across corporate divisions for companies of similar size and in
similar sector.