7. Analysing actual performance II Flashcards
1
Q
- In the unit how is ROI calculated?
A
ROI = EBIT / Total book value of investments
Usually looks like Operating Income / Investment
2
Q
- What is the DuPont method when analysing ROI?
A
The DuPont method of profitability analysis splits the ROI measure into two components: an efficiency measure and a productivity measure, respectively,
ROI = (Operating Income / Sales) x (Sales / Investment)
3
Q
- What are 5 key limitations of ROI?
A
Joint assets and costs Financial control measures Targets vs. cost of capital Initial investment returns Risk of investment
4
Q
- How does EVA work as a management decision making tool?
A
To assess organisational performance against the minimum level considered appropriate to provide an acceptable return to shareholders.
5
Q
- How does EVA work as a Performance metric?
A
EVA evaluates income relative to investment – that is, income compared to the minimum expected return to be received from an investment. This is achieved by the inclusion of a charge for the capital invested
6
Q
- How is EVA calculated?
A
EVA = net operating profit after tax – [WACC × (total assets – current liabilities)]
