22.10 return on owner’s investment (roi)
TRANSCRIPT
22.10RETURN ON OWNER’S INVESTMENT (ROI)
© 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 6,300Average Owner’s Equity
70,000
$Net Profit 6,300Average Owner’s Equity
70,000
$Net Profit 6,300Average Owner’s Equity
70,000
© 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%
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
Return on Owner’s Investment:ROI is very important in making investment
decisionsPeople can invest their capital in many different things
to earn a return, e.g. A small businessBank term depositsSharesPropertyGold
• 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)
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
22.10 RETURN ON OWNER’S INVESTMENT (ROI)
© 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 SheetAssets
Liabilities
Owner’s Eq.
$1
Balance SheetAssets
Liabilities
Owner’s Eq.
$1
$0.05
Net Profit
Balance SheetAssets
Liabilities
Owner’s Eq.
$1
Balance SheetAssets
Liabilities
Owner’s Eq.
$1The firm is earning less Net Profit for each $1
of Capital
$0.15
Net Profit
Balance SheetAssets
Liabilities
Owner’s Eq.
$1
Balance SheetAssets
Liabilities
Owner’s Eq.
$1The firm is earning
more Net Profit for each $1 of Capital
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
Return on Owner’s Investment: how to improve it…
22.10 RETURN ON OWNER’S INVESTMENT (ROI)
Last year… Option 1: Net Profit$
Net Profit 15,000Average Capital 100,000
Net Profit
Average Capital
Return on
Investment
=
15,000
100,000=
15.0%=
$Net Profit 30,000Average Total Capital
100,000
$Net Profit 15,000Average Capital 100,000
$Net Profit 20,000Average Total Capital
100,000
$Net Profit 20,000Average Capital 100,000
Net Profit
Average Capital
Return on
Investment
=
20,000
100,000=
20.0%=
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
Return on Owner’s Investment: how to improve it…
22.10 RETURN ON OWNER’S INVESTMENT (ROI)
Last year… Option 2: Average Capital$
Net Profit 15,000Average Total Capital
100,000
Net Profit
Average Capital
Return on
Investment
=
15,000
100,000=
15.0%=
$Net Profit 30,000Average Total Capital
100,000
$Net Profit 15,000Average Total Capital
100,000
$Net Profit 30,000Average Total Capital
80,000
$Net Profit 15,000Average Total Capital
80,000
Net Profit
Average Capital
Return on
Investment
=
15,000
80,000=
18.7%=
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
TASK
In-class Homework
SQ17 XEx22.4 XEx22.5 X