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22.10 Return on Owner’s Investment (ROI)
1.
22.10 RETURN ON OWNER’S INVESTMENT
(ROI)
2.
© Michael Allison,
Trinity Grammar School. Author’s permission required for external use Return on Owner’s Investment: ROA measures the return provided on the Capital invested in the business by the owner 22.10 RETURN ON OWNER’S INVESTMENT (ROI) Return on Owner’s Investment (ROI) Net Profit Average Capital = 6,300 70,000 = = 9.0% $ Net Profit 6,300 Average Owner’s Equity 70,000 $ Net Profit 6,300 Average Owner’s Equity 70,000 $ Net Profit 6,300 Average Owner’s Equity 70,000
3.
© Michael Allison,
Trinity Grammar School. Author’s permission required for external use Balance Sheet Assets Liabilities Owner’s Eq. $1 22.10 RETURN ON OWNER’S INVESTMENT (ROI) Business $0.09 of Net Profit What does this mean? For every $1 of Capital invested by the owner, the business earns a Net Profit of 9 cents Balance Sheet Assets Liabilities Owner’s Eq. $1 Return on Owner’s Investment (ROI) Net Profit Average Capital = 6,300 70,000 = = 9.0%
4.
© Michael Allison,
Trinity Grammar School. Author’s permission required for external use Return on Owner’s Investment: ROI is very important in making investment decisions People can invest their capital in many different things to earn a return, e.g. A small business Bank term deposits Shares Property Gold • ROI allows the owner to compare the return of alternative investments • What else could they invest their money in? 22.10 RETURN ON OWNER’S INVESTMENT (ROI)
5.
© Michael Allison,
Trinity Grammar School. Author’s permission required for external use 22.10 RETURN ON OWNER’S INVESTMENT (ROI)
6.
© Michael Allison,
Trinity Grammar School. Author’s permission required for external use Return on Owner’s Investment: interpreting the trend,,, Return on Investment (RO1) = 9%< For every $1 of Capital invested, the firm is generating 9 cents in Net Profit <Return on Investment (RO1) = 5% For every $1 of Capital invested, the firm is generating 5 cents in Net Profit Return on Investment (RO1) = 15% For every $1 of Capital invested, the firm is generating 15 cents in Net Profit 22.10 RETURN ON OWNER’S INVESTMENT (ROI) $0.09 Net Profit Balance Sheet Assets Liabilities Owner’s Eq. $1 Balance Sheet Assets Liabilities Owner’s Eq. $1 $0.05 Net Profit Balance Sheet Assets Liabilities Owner’s Eq. $1 Balance Sheet Assets Liabilities Owner’s Eq. $1 The firm is earning less Net Profit for each $1 of Capital $0.15 Net Profit Balance Sheet Assets Liabilities Owner’s Eq. $1 Balance Sheet Assets Liabilities Owner’s Eq. $1 The firm is earning more Net Profit for each $1 of Capital
7.
© Michael Allison,
Trinity Grammar School. Author’s permission required for external use Return on Owner’s Investment: how to improve it… 22.10 RETURN ON OWNER’S INVESTMENT (ROI) Last year… Option 1: Net Profit $ Net Profit 15,000 Average Capital 100,000 Net Profit Average Capital Return on Investment = 15,000 100,000 = 15.0%= $ Net Profit 30,000 Average Total Capital 100,000 $ Net Profit 15,000 Average Capital 100,000 $ Net Profit 20,000 Average Total Capital 100,000 $ Net Profit 20,000 Average Capital 100,000 Net Profit Average Capital Return on Investment = 20,000 100,000 = 20.0%=
8.
© Michael Allison,
Trinity Grammar School. Author’s permission required for external use Return on Owner’s Investment: how to improve it… 22.10 RETURN ON OWNER’S INVESTMENT (ROI) Last year… Option 2: Average Capital $ Net Profit 15,000 Average Total Capital 100,000 Net Profit Average Capital Return on Investment = 15,000 100,000 = 15.0%= $ Net Profit 30,000 Average Total Capital 100,000 $ Net Profit 15,000 Average Total Capital 100,000 $ Net Profit 30,000 Average Total Capital 80,000 $ Net Profit 15,000 Average Total Capital 80,000 Net Profit Average Capital Return on Investment = 15,000 80,000 = 18.7%=
9.
© Michael Allison,
Trinity Grammar School. Author’s permission required for external use TASK In-class Homework SQ17 X Ex22.4 X Ex22.5 X
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