Question

ROI can be compared with the rate of return on opportunities elsewhere, inside or outside the company” Discuss the statement. Similarly, compare and Contrast different methods of Financial Performance Measurement”.

Answer 1

ROI is the abbreviation of Return on Investment. It is a very commonly used financial measure for Profitability. It is calculated as a percentage the formula being {(Current value of investment- Cost of Investment)/Cost of Investment} *100OR Return from Investment/ Investment *100. It measures the return and efficiency of an investment, and is used to compare different investments.

Lets understand this using an example.

let us consider two investment opportunities A and B. Investment and cash flow from project A and B is given as :

	Project A	Project B
Investment	1000	2000
Cash Flow	500	700
Return on Investment	50%	35%

Calculating the Return on investment for various projects will give us the idea which is the better one. Project B has a better cash flow, but return on investment is higher in project A. therefore we will go with Project A,

ROI can be used universally, even within the organisation while making capital budgeting decisions. Companies use ROI to measure the divisional performance within an organization, i.e. what is the return of individual department.

Financial performance can be measured by means of

1. Ratio analysis which measures the liquidity, profitability, operational efficiencies,  

2. Horizontal Analysis: (Trend Analysis) : which helps to compare the data of a single company over a period of time,

3. Vertical Analysis: (Common size Financial statements): This includes the one years' operating results, and expresses each individual item as a % of a total. If we are preparing the Common size Balance sheet, then we take the total assets, if we are preparing the common size Income statement, then we will take the Total revenue.