An investment center includes profit and the efficient use of assets. The traditional performance reports only measure revenue and expenses. We need a way work assets into the evaluation.

Typically when we talk about the efficient use of assets whether those assets are buildings, machinery, furniture, or stocks, we look at how much income those assets are generating. With stocks, we look at the gain on the investment and any dividends the stock pays. With company assets, like buildings and equipment, the income generated is company profit. The company uses those assets to produce products and sell those products.

Make more money now! Try our JOB search.

Investment center performance evaluation uses return on investment (ROI) to evaluate performance.

Return on Investment = Operating Income / Total Assets

This formula will give you a percentage return on investment similar to what you would see when evaluating stocks.

Return on investment can also be calculated by using two other ratios: profit margin and asset turnover.

Profit margin is the percentage of each sales dollars that end up as profit. The higher the percentage, the better the results.

Profit Margin = Operating Income / Sales

Asset turnover tells us how efficiently the company uses assets to generate sales. The company wants to maximize the assets it has to generate as much revenue as it can. These means that the company does not want to have idle equipment or assets that are not in use. This is not a percentage, but the higher the number is the better the results.

Asset Turnover = Sales / Total Assets

Profit margin multiplied by turnover will also give you return on investment.

ROI = Profit Margin X Asset Turnover

This works because sales in the denominator of the profit margin formula cancel out sales in the numerator of the asset turnover formula.

ROI = Operating Income / Sales X Sales / Total Assets = Operating Income / Total Assets

Final Thoughts

Investment centers use return on investment to evaluate managers because return on investment measures the efficient use of assets. A higher return on investment means higher efficiency in asset use.

Share This:


Related pages


contribution format income statement example2014 fica tax ratehow to calculate employer portion of payroll taxesinterest revenue on income statementperiodic inventory system and perpetual inventory systempresent value annuity factorwhat is retained incomewhat are unearned revenuesoverhead rate per direct labor costcost of goods sold cogsjournal entry to record depreciationonline weighted average calculatoraccrued wages payablecost of goods sold chart of accountshow to calculate depreciation of fixed assetsdiscount factor calculatorunearned revenue assetwhat's depreciationaccounting formulas and calculationsweighted average grade formulamerchandising exampleswhat is fica tax ratetable present value of annuityamortize bond premiumhow to calculate manufacturing overhead ratebills payable in balance sheetwhat is indirect material costbad debt expense is reported on the income statement ascost of material consumed meaningrelevant cost for decision making with examplesselling expenses to sales ratioweighted total calculatorfinancial accounting vs managerialdirect labor cost examplescurrent portion of long term debt journal entrywhy we prepare trial balancegeneral and admin expensesmeaning of furniture and fixtureswhat is an allowance for doubtful accountsmachine depreciation formulawashington payroll tax calculatorhow to calculate activity based costingunearn revenuepresent value of annuity factorwhat are outstanding chequesprepaid insurance in accountingwhat is aging of accounts receivableuncollected debtrecording accounts receivablerights of preferred shareholdershow to calculate underapplied overheadpresent value of an annuity due of 1the allowance for uncollectible accounts is ahow to calculate the withholding taxmanagerial accounting cheat sheetis labor a variable costaccumulated depreciation formulabank recsbookkeeping to trial balance examplesdecline in value calculatorfica tax ratesdeferred revenue adjustmentwhat is reconciling a checking accountpercent variation calculatorstraight line depreciation method formulajob order costing journal entriestemporary accounts in accountingadjusting entry for depreciation expenseis base pay gross or netwhat is a federal withholding taxdetermining how transactions change an accounting equationfica payroll deductionmanagerial accounting journal entrieswhat is normal balance in accountingwhat is contra entry give an examplecompute cost of goods manufacturedentries for bonds payable and installment note transactionsmaximum salary for medicare tax