International Journal of Advanced and Applied Sciences
Int. j. adv. appl. sci.
EISSN: 2313-3724
Print ISSN: 2313-626X
Volume 3, Issue 9 (September 2016), Pages: 110-119
Title: A review on the calculation of return on investment
Author(s): E. Chuke Nwude *
Affiliation(s):
Department of Banking and Finance, Faculty of Business Administration, University of Nigeria Nsukka, Nsukka 410001, Nigeria
https://doi.org/10.21833/ijaas.2016.09.016
Abstract:
This paper addresses the conceptual issues in the determination of the return on investment (ROI). It made use of archival research to find out the correct meaning of the term return on investment and its appropriate uses. The findings show that there are several ways to determine ROI. From equity perspective the two main measures of actual ROI are the net profit after interest and tax divide by shareholders’ funds, and the sum of dividend yield (DY) and capital gains yield (CGY). From firm perspective six useable measures of ROI are EBITD/(GFA+GCA), EBIT/(NFA+GCA), EBITD/(GFA+NCA), EBIT/(NFA+NCA), EBITAD/(GFA+GCA) and EBITAD/(GFA+NCA) as the need for each arises. The most frequent error committed and misconception in these computations is in the area of ascertainment of the appropriate denominator in terms of which period figures to use and whether it should be gross or net fixed asset and current asset. EBITAD/Total asset refers to ROI to the firm before amortization and depreciation while ROI to the firm after the amortization and depreciation can be EBIT/ (NFA+NCA) or EBIT/(NFA+GCA) based on choice of the investor but the latter is highly recommended. The ROI to the firm before the amortization and depreciation is EBITAD/(GFA+NCA) or EBITAD/(GFA+GCA) based on choice of the investor but the former is recommended. Measuring ROI based on wealth creation ratio is the division of the end-period value of the investment by the beginning-period value of the investment with benchmark that the ratio has to be greater than one. The mean historical ROI can be ascertained through the use of either arithmetic or geometric mean.
© 2016 The Authors. Published by IASE.
This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).
Keywords: Return on investment, Capital employed, Earnings, Shareholders' funds, Dividend yields, Capital gains yield
Article History: Received 15 June 2016, Received in revised form 10 September 2016, Accepted 30 September 2016
Digital Object Identifier: https://doi.org/10.21833/ijaas.2016.09.016
Citation:
Nwude EC (2016). A review on the calculation of return on investment. International Journal of Advanced and Applied Sciences, 3(9): 110-119
http://www.science-gate.com/IJAAS/V3I9/Nwude.html
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